Multinational Corporations: Emergence and Evolution

Multinational Corporations This book extends current macroeconomic theories of international production by examining the emergence and evolution of multinational corporations (MNCs) from a broad range of developed and developing countries. Multinational Corporations presents case studies of the emergence and evolution of MNCs based in 11 developed and developing countries of widely divergent patterns of national development. Paz Estrella Tolentino’s research agenda was to determine whether variations exist in the pattern of the early stages of outward foreign direct investment (FDI) across different countries, and in their developmental paths over time that are determined by distinctive patterns of national economic development in each country. The countries covered include Brazil, Germany, Hong Kong, Japan, Singapore, South Korea, Sweden, Switzerland, Taiwan, United Kingdom and the United States. This book provides a comprehensive theoretical framework on the emergence and evolution of MNCs from a macroeconomic perspective based on the categorization of MNCs in three groups in accordance with distinctive patterns of national economic development of their home countries: resource-abundant countries, resource-scarce large countries and resourcescarce small countries. Multinational Corporations presents a radical conceptual framework in which to analyse MNCs from a wide range of countries and also promotes the advancement of current knowledge of an important aspect of international business history. Paz Estrella Tolentino is Lecturer in International Business at the School of Management and Organizational Psychology, Birkbeck College, University of London. Her previous book, Technological Innovation and Third World Multinationals—based on her PhD dissertation which received the 1989 Academy of International Business Richard N. Farmer prize for the best PhD thesis on international business—laid the foundations for the elaboration of a concept of stages of development in explaining international production.

Routledge Studies in International Business and the World Economy 1 States and Firms Multinational enterprises in institutional competition Razeen Sally 2 Multinational Restructuring, Internationalization and Small Economies The Swedish case Thomas Andersson, Torbjörn Fredriksson and Roger Svensson 3 Foreign Direct Investment and Governments Catalysts for economic restructuring Edited by John H.Dunning and Rajneesh Narula 4 Multinational Investment and Economic Structure Globalization and competitiveness Rajneesh Narula 5 Entrepreneurship in a Global Context Edited by Sue Birley and Ian Macmillan 6 The Global Structure of Financial Markets An overview Edited by Dilip K.Ghosh and Edgar Ortiz 7 Alliance Capitalism and Global Business John H.Dunning 8 Multinational Enterprises from the Netherlands Edited by Roger van Hoesel and Rajneesh Narula 9 Competition, Growth Strategies and the Globalization of Services Real estate advisory services in Japan, Europe and the United States Terrence LaPier

10 European Integration and Foreign Direct Investment in the EU The case of the Korean consumer electronics industry Sang Hyup Shin 11 New Multinational Enterprises from Korea and Taiwan Beyond export-led growth Roger van Hoesel 12 Competitive Industrial Development in the Age of Information The role of co-operation in the technology sector Edited by Richard J.Braudo and Jeffrey G.MacIntosh 13 The Global Restructuring of the Steel Industry Innovations, institutions and industrial change Anthony P.D’Costa 14 Privatisation and Liberalisation in European Telecommunications Comparing Britain, the Netherlands and France Willem Hulsink 15 Multinational Corporations Emergence and evolution Paz Estrella Tolentino 16 Foreign Direct Investment in Emerging Economies Corporate strategy and investment behaviour in the Caribbean Lou Anne A.Barclay 17 European Integration and Global Corporate Strategies Edited by François Chesnais, Grazia Ietto-Gillies and Roberto Simonetti 18 The Globalisation of Corporate R & D Implications for innovation systems in host countries Prasada Reddy 19 Globalization of Services Some implications for theory and practice Edited by Yair Aharoni and Lilach Nachum

20 A Century of Foreign Investment in the Third World Michael J.Twomey 21 Global Capitalism at Bay John H.Dunning

Multinational Corporations Emergence and evolution

Paz Estrella Tolentino

London and New York

First published 2000 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. © 2000 Paz Estrella Tolentino All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and record ing, or in any information storage or retrieval system, without permis sion in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Tolentino, Paz Estrella E. Multinational corporations : emergence and evolution/Paz Estrella Tolentino. p. cm.—(Routledge studies in international business and the world economy ; 15) Includes bibliographical references and index. 1. International business enterprises—Case studies. 2. Investments, Foreign—Case studies. 3. Technological innovations—Economic aspects— Case studies. I. Title. II. Series. HD2755.5 .T6 2000 338.8′8–dc21 00–030429 ISBN 0-203-20867-6 Master e-book ISBN

ISBN 0-203-26700-1 (Adobe e-Reader Format) ISBN 0-415-14575-9 (Print Edition)

To Alexandra Maissa Farrah T.Soumati with love

Contents

List of tables

xiii

Foreword by John Cantwell

xv

Preface

xix

PART I Introduction 1 The theoretical foundations

3

PART II Multinational corporations from the resource-abundant countries 2 The emergence of multinational corporations from the United States: the period until 1914 3 The evolution of multinational corporations from the United States: the period since 1914 4 The emergence and evolution of multinational corporations from Sweden

22

5 The emergence and evolution of multinational corporations from Brazil

88

6 Conclusion: the emergence and evolution of multinational corporations from the resource-abundant countries

52 75 118

PART III Multinational corporations from the resource-scarce large countries 7 The emergence and evolution of multinational corporations from the United Kingdom 8 The emergence and evolution of multinational corporations from Germany

134

9 The emergence and evolution of multinational corporations from Japan

172

10 The emergence and evolution of multinational corporations from Taiwan

197

11 The emergence and evolution of multinational corporations from South Korea

238

12 Conclusion: the emergence and evolution of multinational corporations from resource-scarce large countries

276

153

PART IV Multinational corporations from the resource-scarce small countries 13 The emergence and evolution of multinational corporations from Switzerland

309

14 The emergence and evolution of multinational corporations from Hong Kong

329

15 The emergence and evolution of multinational corporations from Singapore

357

16 Conclusion: the emergence and evolution of multinational corporations from the resource-scarce small countries

382

PART V Conclusion 17 The emergence and evolution of multinational corporations: implications for theory

403

References

427

Index

449

Tables

1.1 Variations in the early stages of outward direct investment across different types of country 1.2 Potential development paths for outward direct investment, and their association with local industrialization across different types of country 1.3 Technological accumulation and the national course of outward direct investment 2.1 Estimates of the stock of outward foreign direct investment of the United States, 1897, 1908 and 1914 5.1 Some examples of Brazilian multinational corporations

14 15 16 23 92

5.2 The emergence of Brazilian multinational corporations by period and industry 104 6.1 Resource-abundant countries: variations in the early stages of outward direct investment across different countries 6.2 Resource-abundant countries: actual development paths for outward direct investment, and their association with local industrialization across different countries 6.3 Resource-abundant countries: technological accumulation and the national course of outward direct investment 12.1 Resource-scarce large countries: variations in the early stages of outward direct investment across different countries 12.2 Resource-scarce large countries: actual development paths for outward direct investment, and their association with local industrialization across different countries 12.3 Resource-scarce large countries: technological accumulation and the national course of outward direct investment 16.1 Resource-scarce small countries: variations in the early stages of outward direct investment across different countries 16.2 Resource-scarce small countries: actual development paths for outward direct investment, and their association with local industrialization across different countries 16.3 Resource-scarce small countries: technological accumulation and the national course of outward direct investment

119 126

130 277 280

285 383 385

390

17.1 Variations in the early stages of outward direct investment across different 405 types of country 17.2 Actual development paths for outward direct investment, and their association 412 with local industrialization across different types of country 17.3 Technological accumulation and the national course of outward direct 423 investment

Foreword Paz Tolentino has written a worthy follow-up book to her excellent first manuscript, Technological Innovation and Third World Multinationals which was published by Routledge in 1993. In one sense this volume has its origins in her continuation of a critique of John Dunning’s notion of an investment—development cycle of countries. This is a project that she and I had discussed and initially worked on together in Reading, but which she has now taken very much further, to the point at which a new range of ideas has emerged to enable her to generalize more accurately and meaningfully about the international direct investment position of countries. She is to be congratulated on the sterling effort with which she has collated such a wide breadth of evidence and organized it coherently, so as to succeed in deepening our understanding of the variety of evolutionary paths that foreign direct investment (FDI) may follow at the national macroeconomic level. The essential idea of the investment—development cycle is that the stylized or ‘typical’ path of a country is that inward FDI takes off and enhances the earlier stages of development (so the net outward investment [NOI] position of countries becomes steadily more negative as GDP per capita rises), while past some point outward FDI takes off too and grows in accompaniment to the later stages of economic development (so the NOI position becomes gradually more balanced again, and ultimately becomes positive in countries that have attained the highest levels of GDP per capita). Thus, as shown by Dunning, if we plot the NOI position of countries against their GDP per capita in a crosssection from 1970s data, we observe a ‘J-shaped’ schedule. Paz Tolentino showed in her previous book that the shape of this function changed in the 1980s, since outward FDI tends to come now at an earlier stage of national development. Third World firms engage in outward FDI at an earlier stage of national development and experience a faster transformation in the industrial structure of this outward FDI, although it has still become easier to distinguish countries at different levels of development by the industrial composition of their outward FDI than by a simple calculation of their NOI position. As development rises, the industrial structure of outward FDI is widened and evolves towards more complex types of activity. The explanation of the greater speed of corporate internationalization depends on two elements—an account of a change in the international economic environment, and an analysis of the accumulation of technological competence in firms at varying ages or degrees of maturity. The first of these can be taken from Ray Vernon’s discussion of the growth of FDI with the fall in transport and communications costs in the post-war period, together with the more recent emergence (from the 1970s onwards) of a new technoeconomic paradigm based on new organizational forms linked to new information and

communication technologies as suggested by Chris Freeman. The second part can be derived from the modern evolutionary theory of technological change as a localized and firm-specific process, as pioneered by Richard Nelson and Sidney Winter. Firms build up their technological competences or what are termed in the international business field (following John Dunning’s eclectic paradigm) ‘ownership advantages’, through locally differentiated learning activities. Thus, in the 1980s those of us that continued to insist on the concept of ownership advantages as a condition for international corporate expansion reformulated the concept more precisely. Critics of the concept had focused their attack on an interpretation of Hymer’s earliest discussion of ownership advantages, as a net cost advantage of foreignowned over indigenous firms in the relevant local market (and this is still often the version that critics prefer to disparage today, seemingly unaware that the discussion, like the real world, has moved on!) The first and obvious revision is that ownership advantages must be thought of in relation to the international competition mainly from other multinational corporations (MNCs) rather than relative to domestic companies in a particular host country. Today MNCs are generally competing with one another in international markets, they are usually not in the earliest stages of internationalization and their investments are not all of a local market-oriented kind (unlike in Hymer’s case, in which he had addressed the more specific question of why firms initially go abroad and begin to engage in FDI). Second, and more importantly in the present context, innovation and hence innovative advantages are differentiated and relative concepts, not indicative of some notional technology frontier. All surviving MNCs have some distinctive competitive edges, and it is these differentiated firm-specific strengths that constitute each firm’s ownership advantages rather than some overall absolute cost advantage. Hence, Third World MNCs may have as well ownership advantages especially in operating in certain kinds of less developed conditions, and with a change in technoeconomic paradigm some of them have been able to upgrade these advantages more rapidly than they otherwise would, encouraging and facilitating a faster internationalization. Paz Tolentino has now returned to a further issue that she had previously to leave to one side. This issue is that the investment-development cycle was an interpretation of cross-sectional evidence in search of a time series framework of analysis. The argument that countries’ investment positions evolve faster than before is a special case of the more general contention that each country follows some nationally specific path in its FDI, and there is no reason to believe that each country moves along a similar J-shaped path in its NOI position. Indeed, we know that countries like Japan and Korea have witnessed major take-offs in their outward FDI without much prior inward investment, whereas the takeoffs in outward FDI in many European countries such as France or Germany had been partially a response to the earlier penetration of US inward FDI, and their consequent interaction with US MNCs. At one level it is fashionable to attribute such variations to policy differences, but the formation of the policies themselves and the way in which they have worked depend very much on the national institutional environment of countries, which varies greatly. Differences in institutional systems and in the related industrial structures of countries

may be dependent on a range of variables, but two that seem to matter most are the national degrees of resource availability or scarcity, and country size. Paz Tolentino has used these variables to construct a taxonomy of country types, and to organize her voluminous material in a fruitful way. She demonstrates here quite compellingly that the variation in national paths of FDI that we observe can be explained in good measure by whether a country is resource-scarce or resource-abundant, and whether it is large or small. Her book has taken us a good way forward in understanding how the industrial structure of FDI evolves in these different types of country, and on how the form of interaction between inward and outward FDI may (or may not) influence the accumulation of ownership advantages on the part of domestically owned firms, and hence the nature of their own internationalization. I am happy to commend this book to anyone interested in deepening their appreciation of the variety of historical determinants that have shaped and are shaping the growth of international direct investment and the modern multinational firm. John Cantwell

Preface

Intention

In 1991, John Cantwell argued that there are four frameworks in which to analyse the major theories of international production: the microeconomic approach which examines the international growth of individual firms or multinational corporations (MNCs), the mesoeconomic approach which considers the interaction between firms at an industry level, the macroeconomic approach which studies broad national and international trends, and the eclectic paradigm which is not an alternative analytical framework but an overall organizing paradigm which incorporates elements from all the other three types of approaches (Cantwell, 1991). The various theoretical strands comprising the macroeconomic development approach to international production are the earliest version of the product cycle model (PCM Mark I) of Vernon (1966); the integrated theory of trade and direct investment of the Japanese economists, Kojima (1973, 1978) and Ozawa (1982); the concept of an investment-development cycle and path of Dunning (1982); and the stages-of-development approach associated with Tolentino (1993) and Cantwell and Tolentino (1990). However, although the origins of the more modern macroeconomic theories of international production could be traced to the mid-1960s with the formulation of the PCM Mark I, the current stage of development of this set of theories is regarded to be more rudimentary by comparison to the microeconomic or mesoeconomic theories whose origins can be traced similarly to the 1960s. This is owing partly to the demise of the PCM as an analytical tool to explain the more balanced process of technological competition between the United States, Europe and Japan over the last 35 years away from the previous technological hegemonic role of the United States during Pax Americana (Giddy, 1978; Vernon, 1979; Tolentino, 1993) and the more industry-based as opposed to country-based theory of trade and direct investment developed by Kojima couched in the neoclassical Hecksher-Ohlin-Samuelson theory of trade. In addition, although the advancement of more general macroeconomic theories of international production began with the elaboration of the concept of an investment-development cycle of international production by Dunning (1982) which relates the level of inward and outward foreign direct investment (FDI) and the national stage of development of home and host countries, empirical evidence that I had gathered in my PhD thesis on the general trend of internationalization of firms since the mid-1970s showed that this formulation required some qualification (Tolentino, 1987). The refinement of the concept by Dunning to denote the presence of an investment-development path which considers

that both the level as well as the character and composition of the outward FDI of a country’s firms vary with the national stage of development has been extended since by John Cantwell and myself to consider the developmental course of the outward FDI of countries over time (see Cantwell and Tolentino, 1990; Tolentino, 1993). Indeed, the growth of MNCs from a historical perspective shows a developmental course in the pattern of outward FDI from an initial emphasis on trading, resource-based or simple market-seeking investments where the competence of leading national firms is embedded in basic engineering skills, complementary organizational routines and structures. Over time as industrial development of home counties proceed and as their firms gain maturity as MNCs, there is the gradual progression of their outward FDI towards more sophisticated forms of manufacturing and services activities that embody greater technological and organizational complexities. Indeed, the dominant sectoral pattern of outward FDI at the global level had been associated with primary commodity production before 1939, and only since the Second World War did outward FDI in manufacturing and services come into its own in a major way, bringing forth the growth in international technological competition in the industrialized countries and the global integration of FDI. Such an evolution describes the growth of the mature MNCs of Europe and the United States over the last two centuries. The evolution of Japanese MNCs since the Second World War, on the other hand, has been compressed into a much shorter time span. Investments in resource-based activities and import substituting manufacturing in South East Asia led the way in the 1950s until the early 1970s, but since the late 1960s the interest of Japanese firms shifted to more sophisticated manufacturing production in Europe and the United States (Ozawa, 1991). Although MNCs from the Asian newly industrialized countries are nowhere near as technologically advanced as the more established MNCs from Europe and the United States as well as the modern Japanese MNCs owing to the less advanced stage of the industrial development of their home countries, the lower forms of technological competence of their leading national firms and their lack of maturity as MNCs, the sectoral complexity and geographical scope of their international production activities are evolving much more rapidly than that of the more historical home countries of FDI. The main reason for this is the general trend towards the internationalization of business since the mid-1970s which has been common to firms of all countries. Domestic enterprises from the developing countries have, in general, embarked on international production and became MNCs at an earlier stage of their development than industrialized country firms (see Tolentino, 1993 for further support of this argument). Despite the general trend towards the internationalization of business which has been common to firms of all countries and the more rapid pace in the emergence of MNCs from the newer home countries and in the evolution of the pattern of their international production activities, it has become increasingly apparent that the pattern of the emergence and evolution of MNCs are also determined by factors other than the stages of development or maturity of countries and firms. In particular, there seem to be variations in the pattern of the early stages of outward FDI across different types of home countries as well as their developmental paths over time that are determined by distinctive patterns

of national economic development. Since each country or group of countries has a unique pattern of national economic development owing in part to different endowments of natural resources, different sizes of the domestic market and different types of development path pursued in achieving industrial development, the developmental course of international production in each country or group of countries is likely to be unique and differentiated. Thus, any effort to advance the modern macroeconomic theories on the basis of general principles must be comprehensive in its attempt to explain the emergence and evolution of MNCs from a broad range of home countries. This is the major challenge to research that I have chosen to face at the dawn of the twenty-first century and the third millennium. In advancing a conceptual framework to analyse the emergence and evolution of MNCs from a broad range of countries over the course of more than two centuries, the research also hopes to advance current knowledge of an important aspect of international business history—the growth and evolution of MNCs.

Background

The initial idea behind the major research that eventually led to the production of this book was nurtured at the start of my academic career as Lecturer in International Business at Birkbeck College, Univeristy of London, at the beginning of 1995. My research plan at that time was far less ambitious by comparison to the major research that I ended up pursuing. At that early stage, my objective had been simply to advance further the concept of stages of development of international production that I had elaborated in my first book through an analysis of the dynamic and developmental process of international production or the way in which stages of development or maturity of countries and firms determine the pattern of international production of MNCs based in developing countries—a body of research that I had already worked on previously to a considerable extent. On that basis, I completed a paper in the spring of 1995 with the title Third World Multinationals: Emergence and Evolution which was accepted for a competitive session at the Annual Meeting of the Academy of International Business. The conference paper also formed the basis to solicit a contract to publish a book with the same title from Routledge—a contract that I obtained successfully in the spring of 1995. There have been two major factors that determined the direction of research since. The first factor was the realization fairly early on that a confinement of the research to the emergence and evolution of MNCs based in developing countries would have limited use if this was not analysed in relation to that of the more mature and far more significant MNCs based in the developed countries. Not only do MNCs based in developing countries account for less than 10 per cent of the global stock of outward FDI in 1998 (UNCTAD, 1999), but the delimitation of the empirical evidence to this narrow group of countries would preclude the elaboration of a comprehensive macroeconomic theory of international production on the basis of general principles. The second factor was brought about by the opportune time in 1995 when John Cantwell was preparing a research paper

with the title Globalization and Development in Africa, in which he argued that variations in the early stages of inward FDI across different types of countries and their developmental paths over time are determined by distinctive patterns of national development. This idea was applied by Cantwell in the context of mapping the potential development paths of inward FDI in Africa (see Cantwell, 1997). The combination of these two forces dictated the direction of the research since 1996. The research began to build on Cantwell’s idea from the perspective of outward FDI. In particular, the research sought to explore the possibility of the more general application of the proposition that patterns of national development (or industrial development) tend to be associated with equivalent phases of MNC expansion from a broad range of countries. The pursuit of this research agenda required that the empirical evidence be gathered on the growth patterns of MNCs from a significant number of countries that collectively would cover the three distinctive patterns of national economic development envisaged of home countries: the resource-abundant countries; the resource-scarce large countries; and the resource-scarce small countries. After a process of careful selection, I decided to focus on 11 countries to include Brazil, Germany, Hong Kong, Japan, Singapore, South Korea, Sweden, Switzerland, Taiwan, United Kingdom and the United States. During the course of the research, I was always tempted to add more country case studies and, in particular, to include the study of the emergence and evolution of MNCs from the Netherlands or France; but on the other hand I thought that I may already be driving home the point far enough with the existing 11 country case studies and thus to further belabour the point would be totally unnecessary. Besides, I would like to leave some aspect of the research open for the future. With the pursuit of a more ambitious research agenda, it had become rapidly obvious that the conceptual basis of the research would encompass the macroeconomic theories of international production as well as international business history, the latter in both its more traditional micro-economic perspective and more modern macroeconomic perspective. The use of both perspectives has been quite useful in the conduct of the research. The growth and evolution of MNCs from a particular country has often been more clearly illustrated by the analysis of the histories of particularly prominent MNCs based in that country where this was warranted. In 1996 I completed another paper with the title Patterns of Growth of Multinational Enterprises: The Case of the Resource Scarce Large Countries which was accepted for a competitive session at the 22nd Annual Conference of the European International Business Academy.1 With some aspects of the growth of MNCs based in resource-scarce small countries and resource-scarce large countries set in place in these two seminal papers, the research in 1997 and 1998 focused on analysing the growth of MNCs based in resource-abundant countries. As the new year dawned in 1999, I made a firm resolution to shift the major research into high gear and to realize the production of the book within a year. First, I informed Routledge of an important revision of the title of the book to Multinational Corporations: Emergence and Evolution to reflect more accurately the more comprehensive research that I had embarked on. Secondly, I began to pursue the research with some vigour and haste country after country, repeating the almost never endless and exhausting process of

research, drafting, revision, editing and polishing chapter after chapter in the period between January and November 1999. Although the two seminal papers that I prepared in 1995 and 1996 enabled me to have a first draft of seven chapters, the drafts were far from being acceptable as proper book chapters and had to be improved considerably by further research and various rounds of drafting. Those chapters in their final state represent a significant progression far beyond recognition from the seminal papers from which they emerged. This major research project did not have research funding simply because I chose to use the limited time to pursue actual research than to devote it to the speculative and often frustrating exercise of applying for a research grant. In any event, the research consumed so much of my interests that I was determined to pursue it to the end, even if I had to be jack-of-all-trades and be responsible for all aspects of the execution of the research and the production of the book. The success of such determination as seen in this final product is a testament to what can be achieved solely on the basis of my own effort. If there is a debt of gratitude that I have, it is to John Cantwell for two reasons: first, for showing me a possible theoretical framework with which I could explore and eventually found quite useful; and second, for agreeing so graciously to write the Foreword long before he ever saw the book in its final state. Beyond that, I have to thank some Divine Providence for keeping me safe and healthy to conduct this research and to see it through to its end, and to derive genuine pleasure in the final product. However, the greatest joys had been derived from the learning experience as a result of conducting the research. The period of research behind this book also encompassed my journey into parenthood for the first time. Although it has not always been the easiest of tasks to fulfil my multiple roles as a mother and a jack-of-all-trades in the production of this book while also attending to a demanding teaching and administrative position at my current employment, I derived immense inspiration from my daughter who has grown up rapidly over the course of the research. While at the young and tender age of three years she may not have a clear idea of what her mother had pursued so relentlessly in 1999, she is fully aware that the book is dedicated entirely to her. The completion of this book at the dawn of the twenty-first century and the third millennium is symbolic of both the passage of time and a time well spent. Paz Estrella Tolentino November 1999

Note

1 The revised versions of both seminal papers that formed the basis of more major research for this book appear as working papers. These are Third World Multinationals: Emergence and Evolution, Birkbeck College, Department of Management and Business Studies, Working Paper 96/02, 1996; and Patterns of Growth of Multinational Enterprises: The Case of the Resource Scarce Large

Countries, Birkbeck College, Department of Management, Working Paper 97/01, 1997. ISSN 1461 4669.

Part I Introduction

1 The theoretical foundations Introduction This book examines the emergence and evolution of multinational corporations (MNCs). In general, historical observations of the growth of MNCs suggest a developmental course in the pattern of outward foreign direct investment (FDI) from an initial emphasis on trading, resource-based or simple market-seeking investments where the competence of leading national firms is embedded in basic engineering skills, complementary organizational routines and structures. Over time, as industrial development of home countries proceed and as their firms gain maturity as MNCs, there is the gradual progression of their outward FDI towards more sophisticated forms of manufacturing and services activities that embody greater technological and organizational complexities. Indeed, the historical analysis of the developments in the sectoral pattern of outward FDI at the global level shows that the bulk of this investment was associated with primary commodity production before 1939, and only since the Second World War did outward FDI in manufacturing and services come into its own in a major way, bringing forth the growth in international technological competition in the industrialized countries and the global integration of FDI. Such an evolution describes the growth of the mature MNCs of Europe and the United States over the last two centuries. The evolution of Japanese MNCs since the Second World War, on the other hand, has been compressed into a much shorter time span. Investments in resource-based activities and import substituting manufacturing in South East Asia led the way in the 1950s until the early 1970s, but since the late 1960s the interest of Japanese firms shifted to more sophisticated manufacturing production in Europe and the United States (Ozawa, 1991). Although MNCs from the Asian newly industrialized countries (NICs) are nowhere near as technologically advanced as the more established multinationals from Europe and the United States as well as the modern Japanese MNCs owing to the less advanced stage of the industrial development of their home countries, the lower forms of technological competence of their leading national firms and their lack of maturity as MNCs, the sectoral complexity and geographical scope of their international production activities are evolving much more rapidly than that of the more historical home countries of FDI. The main reason for this is the general trend towards the internationalization of business since the mid-1970s which has been common to firms of all countries. Domestic enterprises from the developing countries have, in general, embarked on international production and became MNCs at an earlier stage of their development than industrialized country firms (see Tolentino, 1993 for further support of this argument).

Multinational corporations

4

Despite the general trend towards the internationalization of business which has been common to the firms of all countries and the more rapid pace in the emergence of MNCs from the newer home countries and in the evolution of the pattern of their international production activities, there seem to be variations in the pattern of the early stages of outward FDI across different types of countries as well as their developmental paths over time that are determined by distinctive patterns of national economic development. Since each country or group of countries has a unique pattern of national economic development owing in part to different endowments of natural resources, different sizes of the domestic market and different types of development path pursued in achieving industrial development, the developmental course of international production in each country or group of countries is likely to be unique and differentiated. This is the central theme that permeates the analysis of the emergence and evolution of MNCs in this book, and the hypothesis that the research seeks to validate vis-à-vis the empirical evidence. Since the conceptual framework relating outward FDI and patterns of national development belongs to the set of theories comprising the macroeconomic developmental approaches to international production, the theoretical foundations underpinning the analysis of the emergence and evolution of MNCs proceed from the various theoretical strands of this approach. The development of these various theoretical strands from their origins in the 1960s is therefore provided in the proceeding section of this chapter. The various theories developed have sought to relate the level, character and composition of inward and outward FDI of a country’s firms to the stage of the product life cycle (Vernon, 1966), the comparative advantage of countries (Kojima 1973, 1975, 1978, 1982), the national stage of development (Dunning, 1982, 1986a, 1986c) or the process of domestic industrial development. The latter has been useful in elaborating the concept of stages of development in international production of countries generally (Tolentino, 1993; Cantwell and Tolentino, 1990) as well as the developmental course of outward FDI of particular countries such as Japan (Ozawa, 1979a, 1979b, 1982) and the developing countries (Tolentino, 1993; Cantwell and Tolentino, 1990). By relating the emergence and evolution of international production to distinctive patterns of national economic development in different types of countries, the present research aims to refine the stages of development concept in international production, and therefore contribute to the advancement of more modern macroeconomic theories of international production.

The macroeconomic development approaches to explaining international production The macroeconomic development theories of international production describe the dynamic and developmental process or the way in which stages of development or maturity of countries and firms affect their international production activities. The major theoretical strands comprising this framework are the product cycle model (PCM) Mark I advanced by Vernon (1966) to explain the patterns of American FDI in Europe in the 1960s, the integrated theory of trade and FDI of Kojima and Ozawa which explains the patterns of outward FDI of Japan, and the two more general concepts associated with the

The theoretical foundations

5

investment-development cycle and path identified with Dunning, and the stages of development in international production promoted by Tolentino (1993) and Cantwell and Tolentino (1990). The product cycle model The earliest version of the PCM Mark I, advanced by Vernon (1966) was the first theoretical strand to emerge among the modern macroeconomic theories of international production. The model was developed owing to the limitations of the conventional neoclassical Hecksher-Ohlin-Samuelson theory of international trade in explaining the growth since the Second World War of trade and international production between the United States and Europe with similar proportional factor endowments. In developing the PCM Mark I, Vernon drew on the newer trade theories promoted by Leontief (1954), Johnson (1958), Linder (1961) and Posner (1961). Leontief, Johnson and Posner emphasized the important role of technological factors in explaining American trade patterns. In particular, Leontief alluded to the embodiment of higher skills in American export products, while Johnson referred to the presence of a slower rate of innovation in Europe compared to the United States in explaining the existence of a persistent dollar shortage in Europe. The presence of a technological gap as an important element in explaining trade patterns became more entrenched in the early 1960s with the pioneering work of Posner in developing a theory of trade based on technology gaps, and in particular the different rates of innovation and learning among different firms and countries. At the same time, Linder also proposed that similarity of income levels, factor endowments and demand patterns were the important determinants of the pattern of trade flows. The fundamental principle behind the PCM Mark I is that the extent and form of innovation and product development are determined by demand and relative factor prices which exist in the market particular to the home country of the innovating firm. The presence of a large market, for example, favours entrepreneurial opportunities in the research and development, production and marketing of new products and processes. Furthermore, the presence of high income levels in the United States in the 1950s and 1960s that engender new wants encourages the generation of ownership advantages of American firms in the production of high-value consumer goods and industrial products. The high unit labour costs in the United States relative to production also creates a specific kind of entrepreneurial innovation, i.e. labour-saving innovation. Drawing on the assumptions that products are capable of standardization at various income levels and encounter foreseeable changes in production technology and marketing methods, and that production processes proceed through phases over time and inevitably achieve scale economies, the PCM Mark I delineates three principal stages in the life cycle of a product. The first stage is that of the innovative new product, resulting from the awareness of unique entrepreneurial opportunities and the identification of a novel demand, or the adoption of new methods of production. The PCM further postulates that American entrepreneurs are first aware of opportunities to fulfil new wants by new products concomitant with high average income levels or high unit labour costs. This

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stems from the model’s other assumption that the entrepreneurs’ consciousness of, and responsiveness to, entrepreneurial opportunities are a function of ease of communication with the market place which in turn is a function of geographical proximity. As a result, American entrepreneurs are expected to have a consistently higher rate of expenditure on product development than entrepreneurs from other countries, at least in product lines that fulfil high income wants and that substitute capital for labour. The unstandardized nature of the new product, the high degree of product differentiation or the existence of monopoly in the early stages and the need for expeditious communication between producers, customers, suppliers and competitors underscore the importance of a location of production that favours external economies and the minimization of communication costs. Since the model assumed that these costs increase directly with geographical distance, a location of production which is close to the market is favoured in the first stage. The second stage in the life cycle of a product is that of the maturing product, the result of a certain degree of standardization. The importance of flexibility—arising from the integration of research, production and marketing activities at the site of innovation in the first stage—decreases. Instead, the possibility of economies of scale through mass production increases with the specification of product and process technology. Thus, in contrast to the first stage where product specifications were fundamental, production costs now become far more important. Moreover, demand for the product increases correspondingly and becomes more price elastic with increasing buyer knowledge. In time, the demand for the product increases in other relatively advanced countries as Western Europe with similar demand patterns, especially since the product has a high income elasticity of demand and is labour saving. These foreign markets are first served through exports until the marginal production and transport costs of the goods exported from the home market are below the average cost of establishing a production facility in the export market, where factor costs, appropriate technology and scale economies are divergent from those in the home market. Apart from cost considerations, any threat to the large-scale export business in manufactured products in the form of tariff protection imposed by export markets to promote growth or balance trade as well as the emergence of local competition within the export market becomes a powerful ‘galvanizing force’ propelling the initial import substituting international production of an established firm. The subsequent growth of production of rival firms may result in a threat manifested in the form of declining global share of the market with respect to the initial investor. Besides, the relocation of production abroad increases the possibility of exports to third country markets and even the home market should differences in factor costs surpass transport costs. The third and final stage in the product life cycle is that of the standardized product. The nature of the product at this stage means that accessibility to market information is greater and competition is largely, if not solely, on the basis of price. The search for the lowest cost source of supply therefore becomes the priority of investor firms. At this stage, the ownership advantages of the firm are based mainly on marketing and distribution, unlike the earlier stages where ownership advantages were based on the abilities of the firm to engage in technological innovation.

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A major feature of the PCM is its implicit reply to the Leontief paradox that American firms export more labour intensive goods instead of capital intensive goods with which the United States has a comparative advantage. The PCM describes the research intensive innovative stage of a product and the establishment of a pilot plant as particularly labour intensive because of the demand for research staff and marketing personnel. However, as the product reaches the standardized stage, scale economies become far more important. The mass production of the standardized product necessitates greater capital intensity compared to the greater labour intensity of the innovative stage. In addition to the substitution of capital intensive means of production for labour intensive means of production in the standardized product stage, there is also a substitution or displacement of higher skilled labour by less skilled or unskilled labour. A cost determined equilibrium regulates the shift of these lower skilled and unskilled labour stages of production of standardized products to developing countries where labour costs are lowest and where incomes begin to ‘catch up’. A fourth stage in the product life cycle can therefore be envisaged in which there is a shift in the location of production to developing countries and specifically to the NICs. However, there is a major difference in the nature of American FDI in the developing countries at this stage and that of American FDI in developed countries at an earlier stage. International production by American MNCs in the developing countries is more likely to be of an export-oriented kind that is not driven by local market demand. By comparison, international production by American MNCs in Europe is more likely to be import substituting that is determined largely by demand factors in the host country. The PCM is re-stated clearly in Hufbauer (1965, 1970), particularly its interrelationship with technological gap theories, while the further applications of the PCM in explaining American trade and international production patterns are found most notably in Knickerbocker (1973), Stobaugh (1968) and Wells (1972). Knickerbocker (1973), in particular, used the framework of the PCM to identify the capabilities of American manufacturing companies which enabled their expansion abroad as MNCs, and as a critical determinant of the industrial structure in the process of international expansion. The empirical support for the PCM has extended beyond the analysis of the patterns of American trade and international production. Graham (1975, 1978) and Franko (1976) have examined the significance of the PCM and other theories relevant to an understanding of the development of foreign manufacturing operations of American firms in Europe to the growth in the United States of some of the largest industrial firms based in the western part of Continental Europe. Graham (1978), Flowers (1976) and Hymer and Rowthorn (1970) have also extended the PCM to consider the concept of rivalry between firms from different countries. The theory of Japanese FDI: the contributions of Kojima and Ozawa Like the PCM, Kojima’s integrated theory of international trade and international production also analyses the interaction between ownership advantages and the changing location of production. However, Kojima’s theory differs in the theory of trade upon which it is based. The theory is based on the Hecksher-Ohlin principle of comparative

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advantage (or costs) (Kojima, 1973, 1975, 1978, 1982, 1990). Kojima’s basic theorem is that FDI should originate from the comparatively disadvantaged (or marginal) industry of the home country which leads to lower cost and expanded volume of exports from the host country. This type of FDI is referred to as pro-trade, Japanese-type FDI. The nonequity forms of Japanese resource-based investment in resource-rich countries are regarded as trade-oriented investments because of the assurance of a supply quota or production sharing arrangements with indigenous enterprises in the host countries. Such investments contrast with the wholly owned, vertically integrated resource-based production of firms from the United States and major European countries which originate from the comparatively advantaged industries of the home country and lead to misallocation of resources and a decreased volume of exports from the host country. This type of FDI is referred to as anti-trade, American-type FDI. The oligopolistic and technologically advanced American firms that engage in FDI are seen to be motivated by the defence of their oligopolistic positions, the exploitation of factor markets and the presence of tariff barriers in the developed countries. An important criticism of Kojima’s theory is the way in which import substituting international production is regarded as anti-trade oriented. While import substituting international production may be considered anti-trade oriented at the microeconomic level, this may not necessarily be so at the macroeconomic level unless very restrictive assumptions are introduced in the model. The growth of outward FDI from the United States, Germany and Japan is often accompanied by an increasing level of exports. There is also evidence to suggest that owing to their potentially enclave nature export-oriented international production may play a less significant role in industrial adjustment or in increasing welfare of the host country (Dunning and Cantwell, 1990). Kojima’s theory is essentially an industry-based theory as opposed to a country-based theory as he claims, in as much as Japanese and American MNCs were concentrated in different industries which helps to explain why their international production was aimed principally at serving either export or local markets. The extent to which the theory is country based derives essentially from the general way in which the stage of national development helps to explain the industrial structure of indigenous firms. Although further support for Kojima’s macroeconomic approach to international production was provided by Ozawa (1971, 1977, 1979a, 1979b, 1985), he acknowledges in his later work that the distinctive characteristics of Japanese FDI from 1950 to the early 1970s in resource-based and labour intensive or technologically standardized industries in developing countries belonged to the first two phases of Japanese MNC growth. Since the late 1960s, Japanese FDI has evolved to the third phase involving import substitution and the recycling of trade surplus resulting from the rapid process of industrial restructuring in Japan. Japanese FDI in this phase is focused on the mass production of assembly based consumer durables in high-income countries such as the United States and Europe, supported by a network of subcontractors. A fourth phase of Japanese FDI was discerned to pertain since the early 1980s. International production by Japanese firms in this phase has predominated in the flexible manufacturing of highly differentiated products, involving the application of computer-aided designing (CAD), computer-aided engineering (CAE) and computer-aided manufacturing (CAM) (Ozawa, 1991).

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As with American MNCs, the growth of Japanese MNCs has therefore followed an evolutionary course from resource based and simple manufacturing towards more technologically sophisticated forms of international production. The essential difference between the evolution of American and Japanese MNCs lies in the swiftness with which Japanese MNCs have made the transition through the evolutionary path. Thus, although American and Japanese firms and industries are at a different stage of evolution, Japanese firms have demonstrated their ability to catch up rapidly, keep pace and, in some cases, even surpass technological advancements in the West. In his more recent work, Kojima (1990) acknowledges that more recent American FDI in Japan is largely akin to a Japanese-type FDI as earlier described, while Japanese FDI in the United States has taken on the characteristics of American-type FDI. Such a rapid pace in the evolution of Japanese FDI may be attributed in part to the efforts of the Japanese government to change systematically the composition of the country’s comparative advantage, aided in part by licensed foreign technology (Ozawa, 1974). The view of pro-trade, Japanese FDI thus appears to be a reflection of the early stages of development of Japanese MNCs. The history of Japan’s trade development since the Second World War does not lend support to this form of application of the static theory of comparative advantage which prescribes that Japan’s trade patterns should conform to its comparative advantage then, i.e. the production and export of labour intensive goods and the import of capital and technology intensive goods. Instead, the increasing technological competitiveness and trade surplus of Japan in technologically intensive products provide support for the development of future-oriented technologies, so that the industries and sectors in which a country enjoys the greatest potential for innovation and in which investment may be most beneficial are not necessarily those in which it currently has a comparative advantage (Blumenthal and Teubal, 1975; Pasinetti, 1981). Major new investments by Japanese companies in the electronics components industry and the diversification into new product lines of those in the consumer electronics sector, for example, provides evidence of Japan’s continuing efforts to build an industrial structure based on industries and sectors in which the country has no current comparative advantage (Dunning, 1986b). As a necessary extension of the argument, Kojima and Ozawa (1985) argue that global welfare is increased where international production helps to restructure industries in line with dynamic comparative advantage. Although most MNCs based in developing countries are unlikely to develop as rapidly as their Japanese counterparts who have drawn on frontier technologies, the trend is towards a persistent upgrading of activities for which these firms are responsible (Tolentino, 1993). The phases of development suggested by Ozawa for Japanese MNCs were thus rendered relevant to the study of MNCs based in developing countries. The first two phases of Japanese outward FDI from the 1950s to the early 1970s in resourcebased and labour intensive international production in developing countries are pertinent to explaining the early stages of the growth of newer sources of outward FDI from the developing countries. In the early stages, as domestic industrial development proceeds with domestic firms in the developing countries upgrading their domestic production activities, comparatively disadvantaged (or marginal) industries are relocated abroad as locational advantages accrue in foreign countries at an earlier stage of development. In

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later stages, more sophisticated manufacturing activities are transferred abroad, even to the developed countries. The overseas activities of the NICs in the developed countries since the 1970s, although based on a less research intensive form of technological innovation than the Japanese MNCs, can nevertheless be described as being in the early phases of the import substituting or surplus recycling stage of international production. The underlying development process of international production that permeates the Kojima—Ozawa theory echoes Vernon’s PCM and Dunning’s concept of an investmentdevelopment path. Such similarity exists between Vernon’s PCM and Kojima’s integrated theory of international trade and production despite the different theories of trade upon which the two models are based (Mason, 1980). The comparative advantage based model of Kojima and Ozawa presents a useful explanatory framework within which to view the emergence and evolution of international production from countries undergoing rapid growth such as Japan, Germany and the NICs in more recent years. Both models explain the process of relocation of production of mature or technologically standardized industries as locational advantages favour foreign countries at an earlier stage of development. Such relocation of production is undertaken while the domestic firms still have the technological and organizational advantages associated with lower technology and more labour intensive production activities which can be exploited more profitably in foreign countries with lower levels of technological capacities and production costs. The common theme of a developmental process of international production in the two models is obscured by the misleading theoretical framework adopted by Kojima in his analysis. The concept of an investment-development cycle and path advanced by Dunning shows in more general terms the impact of the national stage of development on both the level and character and composition of international production. The concept of an investment-development cycle and path The idea of an investment-development cycle has been advanced by Dunning (1981a, 1981b, 1982, 1986a, 1986c, 1988). The early versions of the concept proposed that the level of inward and outward FDI of different countries, and the balance between the two, is a function of their stage of development as measured by gross national product (GNP) per capita. It was further suggested that the plotted data of the net outward investment (NOI) and GNP of different countries, both variables normalized by the size of the population, reveal the presence of a J-shaped investment-development curve with countries classified as belonging into four main groups that correspond to four stages of development. However, a fifth stage corresponding to the fifth stage of development was later added (Dunning, 1988). Countries at the lowest or first stage of development have little or no inward or outward FDI, and consequently a level of net outward investment (NOI) that is close to zero. Countries at somewhat higher levels of development attract significant amounts of inward FDI, but as the outward FDI of their own firms is still limited, NOI is negative. The argument then is that, past some threshold stage of development, outward FDI increases for countries at yet higher level of development. The continued growth of their

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outward FDI at a fourth stage results in a positive NOI, and the balance between inward and outward FDI in major industrialized countries consistent with the growth of crossinvestments and intra-industry production results in the return of their NOI to zero at the fifth stage of development. Although the concept of an investment-development cycle proposed a relationship between NOI and a country’s relative stage of development with a balanced investment position in the early and late stages of the cycle, the term ‘cycle’ seems inappropriate when referring to the presence of a J-shaped investment-development curve. The term ‘stages’ or ‘path’ seems more appropriate as countries at higher levels of development have not returned to the NOI position of countries at lower levels of development. Empirical evidence provided in Tolentino (1993) for the period since the mid-1970s showed the existence of a structural change in the relationship between NOI and the country’s relative stage of development as result of the general rise in the internationalization of firms from countries at intermediate stages of development. The growth of newer MNCs from Japan, Germany and smaller developed countries, as well as some of the higher income developing countries, reflects their firms’ capacity to follow the earlier expansion of MNCs from the traditional home countries, the United States and the United Kingdom, at a much earlier stage of their national development. The increased significance of outward FDI from these newer home countries provides first-hand evidence of the general trend towards internationalization so that the national stage of development no longer becomes a good predictor of a country’s overall NOI. More recent versions of the concept of an investment-development path have shown that apart from the level of NOI, the character and composition of outward FDI of a country’s firms varies with the national stage of development (Dunning, 1986a, 1986c). The early forms of foreign investment are frequently resource based or sometimes import substituting, and in each case a specific location is associated with a particular type of activity. However, as firms mature their outward FDI evolves from a single activity or product in a particular location, and adopt a more international perspective on the location of their different types of production activities. Cross-investments between countries become more common at this stage, and the visible hand of the direct organization of an international division of labour by firms replaces increasingly the invisible hand of coordination by international market transactions. The character of international production and the owner-ship advantages of firms become less determined by conditions peculiar to their home countries, but increasingly by firm-specific factors. The concept of stages of development in international production My earlier works have extended the perception of the later versions of the concept to the investment-development path by proposing that the outward FDI of countries themselves follows a developmental or evolutionary course over time (see Tolentino, 1993; Cantwell and Tolentino, 1990). Thus, outward FDI of countries has tended to predominate initially in trading, resource based or simple forms of manufacturing that embody limited technological and organizational requirements in the earlier stages of development. Factors specific to the home country such as the abundance or scarcity of natural

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resources or the size of the domestic market have tended to engender particular ownership advantages of MNCs of different national origins. For example, the early forms of ownership advantages of American and British firms in wood processing and metal and coal processing respectively were acquired owing to the abundant availability of timber and coal in the United States and the United Kingdom (Rosenberg, 1976). As home countries advance through progressively higher stages of industrial development and as their firms gain maturity as MNCs, the technological and organizational embodiment of their outward FDI activities becomes more significant and more complex. This is evident partly in the growth of their research intensive investments in centres of innovation in the developed countries through which firms gain access to more advanced but complementary forms of foreign technology which can be adapted and integrated within their indigenously created programme of technology generation. As a result, the developmental course of MNCs from the developing countries that are of more recent vintage has also been evolving rapidly, but has a distinctive technological tradition compared to the more mature MNCs from Europe, the United States and Japan owing in part to the earlier stage of their national development at which domestic firms in developing countries have acquired the capacity and the incentive to become MNCs. The changing complexity of outward FDI as development proceeds is associated closely with a changing geographical scope. The simpler forms of investment in resource-based activity or simple manufacturing are frequently undertaken in host countries that are rich in natural resources or have an abundant supply of low-cost labour, or in countries with a close psychic distance, while more complex research intensive investments are undertaken in more industrialized countries. The sectoral and geographical development of international production of countries associated with the innovative capacities of domestic firms is therefore a gradual process over time, and one that is predictable to some extent. The emergence and evolution of international production in relation to distinctive patterns of national development More recent refinements of the concept of stages of development in international production are predicated on the premise that variations in the early stages of inward FDI across different types of countries and their developmental paths over time are determined by distinctive patterns of national development (see Cantwell, 1997). As mentioned, the developmental course of inward FDI in each country or group of countries is likely to be unique and differentiated since each country or group of countries has a unique pattern of national economic development owing in part to different endowments of natural resources, different sizes of the domestic market and different types of development path pursued in achieving industrial development. This idea was applied by Cantwell (1997) in the context of mapping the potential development paths of inward FDI in Africa. The present research builds on this idea from the perspective of outward FDI. In particular, the research seeks to explore the possibility of the more general application of the proposition that patterns of national development (or industrial development) tend to

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be associated with equivalent phases of MNC expansion from a broad range of countries.1 This dictum has antecedents in the eclectic paradigm of Dunning (1981a, 1988), and in the work of Swedenborg (1979), Clegg (1987), Wilkins (1988b), Porter (1990) and Lane (1998) among others. In the analysis of ownership-specific advantages in the eclectic paradigm of international production, Dunning distinguishes between those advantages that are determined by country-specific factors (i.e. those that accrue to all firms of one nationality over those of other nationalities), in addition to those that are determined by industry-specific factors (i.e. those that accrue to all firms within a given industry) and firm-specific factors (i.e. those that enable a firm to compete successfully with other firms within their own industry both in domestic and international markets). The country-specific factors may be generated by the size of a country’s market, level of income, resource endowments, educational system, government policy toward R&D, patent and trade mark legislation, etc. Swedenborg (1979) considered such home country characteristics as firm-specific knowledge, size of the home market, resource endowment, distance to major markets, etc. as relevant determinants of both the industrial and geographical distribution of outward FDI. Similarly, Clegg (1987) cited countryspecific variations in licensing, exports and outward FDI which are explained by the indigenous environment and resource advantages of home countries and also its institutions, government policy and the maturity of firms in international economic involvement. Furthermore, Wilkins (1988b) argued that all companies with outward FDI have been shaped by economic and other conditions in their home country, and only subsequently by economic and other conditions in their host countries. Unique national characteristics in each home country have thus an impact on the nature and extent of the outward FDI of firms. This includes factor costs, level and pace of industrialization, areas of technological expertise, size and nature of the domestic market, relationships between banks and industries, national endowments of and requirements for natural resources, the availability of professional education, the country’s position as an exporter or importer of capital, government policies, geographical position, trade patterns, emigration, and culture and taste. Porter (1990) also developed the proposition that the national environment plays a central role in the competitive success of firms and industries. In that view, the home nation influences the ability of its firms to succeed in particular industries. This relates closely to the theory of Lane (1998) that the extent of embeddedness of MNCs to their home countries and in particular their degree of implantation into national economic and policy networks and national business systems influences their internationalization strategy—the degree of outward FDI undertaken, the kind of competitive advantages the MNCs possess and the kind of competitive advantages MNCs derive from FDI and the way in which nationally based and globally based activities are combined. In the analysis of the relationship between national economic development and the development paths of outward FDI in this research, countries are classified into groups in the way that Cantwell (1997) had described when analysing developmental paths of inward FDI, the justification being that the sectoral or industrial patterns of outward FDI bear a close analogy to that of inward FDI in an earlier period. The analogy emerges partly from the role of inward FDI as a major modality of technology transfer to the host

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country (Findlay, 1978; Lall, 1983a), as a result of which there is developmental upgrading of innovative domestic industries and the enhancement of indigenous technological competence of host country firms that are able to respond competitively to the presence of foreign based MNCs by undertaking outward FDI at a later stage (see Dunning and Cantwell, 1982 and Tolentino, 1993 for further elaboration and support of this argument). The country groups vary according to the distinctive patterns of national economic development of home countries which take into account endowment of natural resources, the size of the domestic market and the type of development path pursued in achieving industrial development. Three country groups are described: resource-abundant countries, resource-scarce large countries (with resource-intensive production) and resource-scarce small countries (with non-resource-intensive production) (Table 1.1).2 The organization of countries in these groups facilitates the identification of the dominant form of earliest outward FDI, as well as the type of locally based firm that initiated outward FDI. This assumption is predicated on the premise that since patterns of national economic development are distinctive between country groups, the distribution of firm-specific knowledge across industries in different countries would also tend to differ—at least in the early stages. This means that there may be a peculiar home country-specific element to the analysis of outward FDI since ownership advantages—although these may

Table 1.1 Variations in the early stages of outward direct investment across different types of country

Categorization of national development Resource-abundant countries

Examples ofDominant Type of locally countries form of based MNC earliest outward FDI

Brazil Resource Resource-based Bolivia (tin) oriented, and firms Chile local market (copper) oriented in large Indonesia countries Manufacturing Malaysia firms, Philippines backwardly Thailand integrating Canada Sweden Russia(oil) United States Resource-scarce large Argentina Local market Trading countries (with South Korea oriented, trade companies resource intensive Taiwan related production) Germany Manufacturing

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Japan firms, serving United local markets Kingdom Resource-scarce smallHong Kong Export oriented, Offshore countries (with non- Singapore service based producers resource intensive Belgium production) Netherlands Service firms (trade, shipping, Switzerland finance) Source: Author’s adaptation based on Cantwell (1997).

remain the property of firms—vary in a systematic manner between countries (Clegg, 1987) owing to differences in national economic structures, values, cultures, institutions and histories. The generation and maintenance of competitive advantages thus tends to be a localized process (Porter, 1990). The evolution of outward FDI, i.e. its development path, is closely associated with domestic industrial development regardless of country groupings according to patterns of national development. However, the precise form of the relationship varies among country groups (Table 1.2). Thus, while locally based MNCs from resource-abundant countries can be expected to diversify from an initial concentration in resource extraction towards downstream processing of natural resources in resource-rich host countries, locally based MNCs from resource-scarce large countries are expected to upgrade their international production steadily from resource processing towards more capital and technology intensive industries. The rapid evolution of outward FDI is associated with industrial upgrading and the generation of strong production and export position in the home country. Finally, the evolution of outward FDI by

Table 1.2 Potential development paths for outward direct investment, and their association with local industrialization across different types of country

Categorization of Link between domestic Type of locally national development and the growth based MNC development of outward FDI Resource-abundant Related diversification (for countries example from mining), downstream processing (for example, metal processing, wood products, petrochemicals, agribusiness), with some other upgrading of industry in large countries Resource-scarce Industrial upgrading and export

Resource-based firms

Manufacturing firms

Manufacturing

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large countries

growth (as wages rise following firms productivity growth), growth in Services firms t f simpler i Resource-scarce iShift away from Manufacturing small countries manufacturing activity to some firms, relocating industrial upgrading, but more activity towards a greater service International orientation service companies Source: Author’s adaptation based on Cantwell (1997).

locally based MNCs from resource-scarce small countries are expected to be far more limited and although there may be some industrial upgrading, there is a marked tendency towards greater service orientation. Locally based MNCs from these resource-scarce smaller countries are thus expected to have significant FDI in the service industries owing to the development of their home countries as service economies. Thus, the pattern of domestic industrial development influences greatly the emergence and evolution of outward FDI, and the main avenue through which this occurs is through the development of local technological competence of leading national firms. The emergence and evolution of local technological capacities are expected to vary according to patterns of national development and influence the type of outward FDI and its industrial course over time (Table 1.3).

Structure of the book The conduct of the research of the emergence and evolution of MNCs on the basis of three main country groups that accord with distinctive patterns of national economic development dictated the structure of the book. Part II analyses the MNCs from the resource-abundant countries and, in particular, those based in the United States (Chapters 2 and 3), Sweden (Chapter 4) and Brazil (Chapter 5). Part III investigates the MNCs from the resource-scarce large countries and, in particular, those based in the United Kingdom

Table 1.3 Technological accumulation and the national course of outward direct investment

Stages of national development (1) (2) (3) Form of technological competence of leading

Basic engineering More skills, sophisticated complementary engineering organizational practices, basic

More sciencebased advanced engineering, organizational

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scientific structures reflect knowledge, more needs of complex coordination organizational methods Type of Early resource- or More advanced Research-related outward direct market-seeking resource-oriented investment and investment investment or marketintegration into targeted international investment networks Industrial Resource-based More forward More course of (extractive MNCs processing of sophisticated outward direct or backward resources, wider manufacturing investment vertical local marketsystems, integration) and oriented and international simple export-platform integration of manufacturing manufacturing investment Source: Author’s adaptation based on Cantwell (1997). indigenous firms

routines and structures

(Chapter 7), Germany (Chapter 8), Japan (Chapter 9), Taiwan (Chapter 10) and South Korea (Chapter 11). Part IV examines MNCs from the resource-scarce small countries and, in particular, those based in Switzerland (Chapter 13), Hong Kong (Chapter 14) and Singapore (Chapter 15). These 11 home countries, comprising six developed countries and five developing countries, accounted collectively for two-thirds of the global stock of outward FDI in 1998. The six developed countries accounted for an equivalent share of the stock of outward FDI of the developed countries, while the five developing countries accounted for 69.5 per cent of the stock of outward FDI of the developing countries (based on data in UNCTAD, 1999). The selection of these 11 home countries of widely divergent national characteristics was necessary to demonstrate the relevance of the interrelationships between the developmental process of outward FDI and distinctive patterns of national development and to advance the development of a comprehensive theory of the emergence and evolution of MNCs. Current theories in the macroeconomic development approach which are based on research of MNCs based in only one or two countries such as the United States (the PCM) and Japan (Kojima and Ozawa’s theory) can hardly form the basis of general principles. Each country chapter analyses the developmental course of outward FDI of MNCs based in that country over time. It examines over time the fundamental determinants of outward FDI, its dominant industrial and geographical patterns, market orientation and the kind of locally based firms undertaking the outward FDI. The main conclusions drawn from the evolutionary analysis of MNCs from each of the country groups are presented in Chapters 6, 12 and 16. The research seeks to determine whether distinctive patterns in the emergence and evolution of MNCs indeed exist between MNCs in the group of resource-abundant countries, the group of resource-scarce large countries and the group of resource-scarce small countries owing to unique patterns of their national

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economic development. Finally, the implications of the study of the history of MNCs for theory development are explored in Chapter 17 in Part V.

Notes 1 In fact, there is increasing evidence to suggest that a more appropriate unit of analysis is the sub-nation or regions and not the country. See, for example, the works of Cantwell and Iammarino (1998a, 19981), 1999), Dunning (1998) and O’Farrell et al. (1996). This is because there are regional differences within countries in terms of technological innovation and in their ability to attract inward FDI and to generate outward FDI. For further discussion of the analysis of the location of innovative activities of MNCs in regions within Italy, the United Kingdom and Europe, see the various papers by Cantwell and Iammarino. Their papers suggest that investments in innovation at the national level are determined by those at the regional level. Since investments in innovation at the regional level are the ‘building blocks’ of innovation at the national level, then it follows that the regional scope of innovation is much more important than the national one. The effects of regional differences on the internationalization behaviour of local firms in the business services sector are discussed in O’Farrell et al. (1996). While recognizing the importance of regional specificities in determining the emergence and evolution of MNCs based in a particular country, this has not been the main object of the research which focuses on country-specific patterns that differentiate MNCs based in different countries. In the pursuit of this research question, the country is, therefore, the appropriate unit of analysis. 2 Thus, countries rich in natural resources are included in the group of resourceabundant countries. Resource-scarce countries, on the contrary, are those that are less abundantly endowed with natural resources. In analysing the development path in inward FDI of the resource-scarce countries, it became apparent that there was the need to differentiate countries belonging to this group according to size (Cantwell, 1997). This is because resource-scarce countries with large domestic markets tended to pursue resource intensive domestic and international production, while resourcescarce countries with smaller domestic markets pursued non-resource intensive domestic and international production.

Part II Multinational corporations from the resource-abundant countries

2 The emergence of multinational corporations from the United States The period until 1914 Introduction The United States accounted for no more than 18 per cent of the global stock of outward FDI in 1914—a share much lower than that of the largest home country, the United Kingdom, with more than 45 per cent (Dunning, 1983). Mexico, Cuba, Panama (and perhaps some other Central American countries) were probably the only host countries in the world where American foreign direct and portfolio investments in 1914 exceeded the British stake (Wilkins, 1970). Nevertheless, the share of the United States in the global stock of outward FDI grew rapidly to reach almost 28 per cent by 1938 and more than 47 per cent in 1960 (Dunning, 1983). Although the relative importance of the United States as a home country for FDI has declined to 24–25 per cent of the global stock since 1990 owing to the rise in the absolute importance of outward FDI from newer source countries such as Germany and Japan, the United States has, nevertheless, remained the single largest source country of outward FDI since the Second World War.1 Thus, no historical account of the emergence and evolution of international business would ever be complete without the analysis of the growth of American MNCs. Given the long history of American MNCs and the presence of a rich and abundant historical literature on the subject, the analysis of their emergence and evolution is conducted in two chapters. This chapter covers the period of their emergence until 1914, while the following chapter covers the period of their evolution in the period since 1914. The account of the growth of American MNCs in these two chapters, although based mainly on the detailed and comprehensive data and information contained in Wilkins (1970) and Wilkins (1974), has aimed to distill the essence of the dynamic changes in the determinants and the sectoral and geographical patterns of American FDI abroad from its origins, with the help in some cases by references to other sources. The emergence of American MNCs can be traced to the pioneering foreign investments of American merchants in the late seventeenth and especially the eighteenth century. By the late nineteenth century, railroads accounted for the largest share of American FDI at almost 23 per cent. These foreign investments in railroads paved the way for the emergence and growth of American FDI in mining which at that time accounted for the second largest share. The manufacturing sector was the third-largest recipient of American FDI in the late nineteenth century, followed by the petroleum and

The emergence of multinational corporations from the United States: the period until 1914 agricultural industries. Although their relative importance has changed in the period leading to 1914, these remained the five most important industries of American FDI in 1914 (see Table 2.1). The analysis of the emergence of American MNCs in this chapter begins with the foreign investments by American traders in the colonial times and the early years of American independence. The discussion then proceeds with the analysis of American participation in foreign railroads and other transportation. The general factors behind the emergence and growth of American FDI in mining, manufacturing, petroleum and agricultural industries between 1893 and 1914 is then considered, followed by a more detailed examination of American FDI in each of those major industries. Finally, some main conclusions are drawn about the changing industrial and geographical patterns of American FDI in the period until 1914.

The evolution of the early American traders to American foreign direct investors The installation of American mercantile houses overseas as well as the foreign branches of American merchants, and the transformation of traders into investors in other foreign businesses constituted the initial phase in the history of American business abroad (Wilkins, 1970). The colonial merchants of the late seventeenth and especially of the eighteenth century pioneered in planting America’s first investment stakes in foreign lands. Table 2.1 Estimates of the stock of outward foreign direct investment of the United States, 1897, 1908 and 1944 (book value, US! million)

By the eighteenth century the typical colonial trader that engaged in foreign commerce used either independent agents abroad—generally British but on occasion transplanted Americans—or appointed a member of his own family as an overseas agent. American merchants would use British independent agents in foreign countries where the volume of

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business was not large enough to warrant an outpost.2 In other cases, transplanted Americans were used: these formed one aspect of American business abroad. These were individual Americans that migrated to Europe or to the West Indies and established foreign enterprises to handle the overseas trade of American merchants and firms. The enterprises established abroad had no parent company in the United States and were not, therefore, branches of American companies. Such transplanted Americans started the first American firms overseas in the 1730s and 1740s.3 Some colonial merchants, preferring not to rely on independent agents abroad, sent members of their families to handle their overseas trade. This was the earliest evidence of the establishment of a foreign branch house, as in most cases the overseas representative was financed by an American enterprise. As with the independent agent, the overseas representative often acted for a number of American traders, not just his own family firm. The choice of using independent agents or establishing their own trade representation abroad or ‘markets and hierarchies’ (Williamson, 1975, 1986) as alternative modes for conducting overseas trade transactions was based on the adequacy of existing independent agents, their potential to exhibit opportunistic behaviour, the frequency and volume of trade and the profit opportunities in a particular foreign market. If there were an adequate number of independent agents present in a foreign country that were trustworthy and if the trade volume and profit opportunities were small, colonial merchants preferred generally to use existing independent agents (either European or transplanted American) who would buy and sell on order or consignment. In such circumstances no investment was made by the American enterprise, apart from the goods involved in each trading transaction. The market transaction between colonial merchants and independent agents took the form of ‘relational contracting’ (Williamson, 1986) and informal enforcement, where long-term relationships between the colonial merchants and independent agents substituted for common ownership. On the other hand, should the volume of business in a foreign country be large and the profit opportunities tempting, there were increased risks of market failure or high transaction costs associated with information impactedness and bounded rationality (i.e. the unavailability of perfect and full information at zero costs leading to limited rationality of individuals and the high costs of negotiating and concluding complete contracts) and the greater tendency for opportunistic behaviour on the part of independent agents (Coase, 1937). This was particularly the case in the profitable trade with England and the West Indies. In these important export markets, the seller often felt that uncertainty could be overcome and greater control over foreign business could be had if the transaction was brought under ‘unified governance’ (Williamson, 1986) through the establishment of the firm’s own overseas representative.4 This is an historical application of the modern theory of ‘internalization’ of markets as applied in the case of international production by Buckley and Casson (1976). The close supervision afforded by the overseas representative would enable the foreign business to expand more rapidly inter alia because trading risks were minimized. The American merchant or trading firm could expect more personal attention to its goods, more satisfactory storage facilities, more information on markets, more beneficial credit arrangements and, more importantly, an

The emergence of multinational corporations from the United States: the period until 1914 opportunity to retain profits within the firm. However, there were costs involved with the establishment of an overseas representative: the salary of the representative abroad and the expenses of an office and warehouse, the costs of acquiring knowledge (at least initially) of a particular market and the loss of trade financing if the American merchant obtained this from an independent foreign agent (Wilkins, 1970). With the withdrawal of preferential trade treatment by the British empire after American Independence, new products for export as well as new and more distant markets were sought by American merchants. Cotton surpassed tobacco in importance and became the largest export of the United States by 1803. Closely associated with the diversification of American exports destined to wider markets was the establishment of more transplant American trade agents overseas. At the end of the 1830s or earlier, transplant Americans who acted for American traders were resident in Madagascar, Zanzibar, Smyrna and Bombay. There was also a collection of independent American trading agencies and branches of American commercial concerns in Cuba, the West Indies, Canada and Newfoundland in the 1820s and 1830s and in many Pacific islands and Canton in the late eighteenth century. Meanwhile, new trading commitments were made in the United Kingdom. In Liverpool, there were both merchants collecting goods for sale and some representatives of American mercantile houses handling cotton. By the 1830s, a large number of American merchants resided in England. Nonetheless, in spite of the increase in American trading outposts in foreign countries, American merchants continued to use independent European—mainly British—houses as their foreign agents in certain foreign ports (Wilkins, 1970). Although outward FDI by individual traders and trading firms did not account for the bulk of capital outflows of the United States in the colonial period and in the early years of the republic, Wilkins (1970) argues that American mercantile activity affected the later growth of American international business in a number of significant ways. First, the accumulated surplus capital from the trading ventures was directed in a large part towards American domestic enterprises in real estate, transportation, industry and mining. The development of an American national market, made possible by the establishment of railroads that linked different parts of the United States, led to the emergence of national firms that later evolved to became international firms. Foreign ventures by American firms in railroads, mining, manufacturing and natural resource extraction later started their own wave of American FDI which became the most important sectors of American FDI by the late nineteenth century. Second, while none of the American FDI made either by independent agents or by members of a trader’s family in England and islands in the West Indies during the colonial period lasted, a small number of the pioneering American businesses abroad in the post-colonial era continued for years as permanent trading posts (Wilkins, 1970). By the mid-nineteenth century, the continuity of such trading companies became more common. These American trading firms became agents of large American industrial companies in their early forays in foreign sales. It was only when foreign business in American manufactured products expanded in a major way that American industrial firms begin to handle their overseas marketing themselves. Third, there was the metamorphosis or merger of particular mercantile businesses into

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more diversified and sometimes entirely different enterprises engaged in lines of businesses besides commerce. Some broadened their functions by integrating into mining, agriculture, industry, transportation and banking. Sometimes this transformation took place abroad and sometimes in the United States. Of most interest was the change that occurred overseas. The first case of an an American trader turned foreign direct investor was David Beekman, the son of the New York merchant Gerardus Beekman, who went to St Croix to represent his family’s sugar trading firm in the 1750s. Profits earned from sugar trading provided the capital for the purchase of sugar estates on the island. Similarly, the Boston Fruit Company—the predecessor of United Fruit Company—invested its earnings from trading and shipping concerns in the Caribbean in banana plantations in the region. This pattern of American traders becoming foreign investors through vertical integration in agriculture, mining, and to some extent in railroads and industry became typical in years following. The evolution of the nineteenth century trader into an investor was a result of either accident (i.e. through extending credit and acquiring property as a result of the debtor’s default on debt) or made on purpose through the intentional integration of the business.5 In neither case was much, if any, capital exported from the United States. Foreign capital investment was made either through the credit line or the reinvestment of profits accrued abroad (Wilkins, 1970). The earliest American private banks to venture overseas also had their genesis in trading companies. The House of Morgan, with its London connection, evolved in 1837 from the mercantile business of George Peabody. Samuel B. Hale’s Argentine trading firm also moved into banking whose main business was the flotation of loans for the Argentine national government and several provincial governments.6 From the late 1840s onwards, the financial dealings of the American firms Lazard Frères, Seligman, and Morton, Bliss & Co. that set up branch banks in Europe also emerged out of mercantile endeavours. These firms found trading in money to be more lucrative than trading in goods. By number of ventures, the foreign trader turned foreign investor was the most significant form of American FDI during the colonial times and in the first 75 years of the republic (Wilkins, 1970).

American participation in foreign railroads By size of investment, railroads accounted for the largest share ($144 million or 23 per cent) of American FDI in 1897. Although the level of American FDI in railroads grew steadily, reaching some $161 million in 1908 and $255 million in 1914, its share in total American FDI declined to less than 10 per cent in those years (see Table 2.1). American capital investment in transportation was most significant in Panama and Nicaragua in the period before the American Civil War (1861–65) and in Mexico, Canada and the Caribbean in the period between 1880 and 1914. Mexico, Canada and the Caribbean together accounted for 99 per cent of all American FDI in railroads in 1897 and 1908 and even by 1914 these neighbouring areas continued to account for more than 94 per cent of American FDI in railroads. American participation in foreign railroads

The emergence of multinational corporations from the United States: the period until 1914 came in the form of horizontal integration in the western hemisphere by American railroad companies or by the forward vertical integration of agricultural and mineral companies in the ownership of railroads to facilitate the transport of agricultural produce, mineral ores or mineral products. The United Fruit Company, the Cerro de Pasco Mining Company and the mineral investments of the Guggenheims were some of the excellent cases in point.7 In some cases and, perhaps more significant in number, was the American participation in railroads in the Caribbean, Canada and South America where their main contribution came not from the provision of American capital but in the ingenuity, talent and expertise provided by American entrepreneurs, syndicates and small companies in the construction of railroads.8 The railroads investments in the western hemisphere were considered the international extension of the domestic business plans of American railroad companies (Wilkins, 1970). Such was the case with the construction of the Panama railroad and the Nicaraguan carriage-steamboat line by the Panama Railroad Company and the Accessory Transit Company, respectively. The stake in the Panama railroad by the Panama Railroad Company (chartered in the New York legislature on 7 April 1849) with authorized capital of $1.5 million (later increased to $5 million) was considered an exceptional and the first truly large American capital investment in a foreign land. The enterprise had the unique feature of combining the export of American skills, techniques and capital on what was for the time a mammoth scale (Wilkins, 1970). After 1856, with no other route across the Central American isthmus, and until the completion of a United States transcontinental railroad in 1869, the Panama railroad provided the undisputed best means of transport from the American East to the American West. Similarly, the carriage-steamboat Nicaraguan route established for $2 million was the best approach to the American West in the period from 1851 to 1855, carrying some 20,000 people annually across the isthmus.9 The establishment of foreign railroad networks in Mexico, Canada and the Caribbean by American firms and individuals enabled the further expansion of American business overseas. The Panama railroad stimulated significant business opportunities as well as trade between the American East and the American West, to China, Australia, Europe and the East Indies. Similarly, the railroads constructed by American capital in Mexico supported the emergence and development in that country of business opportunities for American companies in mining and agriculture. A similar stimulus to business and trade opportunities brought about by the railroads was evident in South America and the Caribbean where, despite the lower level of American capital investment in railroads, the development of railroads in those regions paved the way for the growth of further American investments in mining and agriculture, respectively. At $221 million, the level of American capital investment in mining accounted for more than two-thirds of American capital investment in South America in 1914. On the other hand, American capital investment in agriculture, amounting to some $181 million, accounted for almost half of American capital investment in the Caribbean in 1914.

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American FDI in mining, manufacturing, petroleum and agriculture in the post-Civil War period until 1914 The period since the American Civil War and in particular from 1893 to 1914 described the large-scale expansion of American FDI. The phenomenal growth of American MNC activity abroad made the United States a net exporter of capital from 1898 to 1905 (Wilkins, 1970).10 Factors relating to the home country, host countries and the firm had a pronounced influence on the growth of American MNCs during this time. The push factors associated with the growth of the firm and of conditions in the home country (i.e. the economic environment of the United States, including actions by the United States government) combined with the pull of profitable business prospects abroad (the growth of foreign markets, the availability of foreign sources of supplies and actions by host country governments) contributed to the rising levels of American FDI in the decades before 1914. The following sections analyse these factors more closely. Home country-specific factors and firm-specific factors There were several home country-specific factors as well as firm-specific factors that were fundamental to the expansion of American FDI in the period before 1914. First, the emergence and expansion of American FDI in mining, petroleum and agriculture can be linked to the presence of rich and abundant natural resources in the United States. The United States was the world’s largest producer of copper, lead and petroleum in 1900, and was the second largest producer of bauxite, gold and zinc (Jones, 1996). Combined with a high agricultural productivity, this enabled the United States to shape its economic destiny on the basis of natural resources. American firms thus developed management and organizational skills and technologies in natural resource extraction and processing which were exploited profitably abroad.11 The accumulated skills and technology of American firms in natural resource extraction and processing were particularly important when the United States demanded increasing amounts of minerals, petroleum and foodstuffs which could not be met fully by domestic sources of supply. Similarly, the emergence and expansion of American FDI in manufacturing can be linked to the rapid development in the 1850s of American technologies in certain metallurgical industries (i.e. machine tools, guns, reapers, and sewing machines) linked with mass production in which the United States had already acquired world leadership (Wilkins, 1970). The American companies with novel products and whose entrepreneurs exhibited farsighted leadership grew rapidly and made the most far-ranging investments in foreign countries. These features describe consistently the growth of American MNCs over time, particularly in the manufacturing sector. The development of American skills and American technology were key to the growth of their FDI—whether in search of supplies or in search of markets. Second, the slow growth of domestic demand brought about by the depression in the

The emergence of multinational corporations from the United States: the period until 1914 United States between 1893 and 1897 led American companies with surplus production to turn to foreign markets as an outlet for goods that could not be sold at home. As their exports to foreign markets started to rise, companies established sales branches abroad initially and then factories at a later stage to maintain and increase their foreign sales. Third, there was the development of large enterprises resulting from the trend towards domestic mergers at the end of the nineteenth century. The trend was facilitated by the development of the American capital market and encouraged by the Sherman Antitrust Act of 1890 that forbade agreements among independent companies to restrain trade. Indeed, the domestic firms that survived the depression were the very large enterprises that resulted from the merger movement during this period. The modern industrial enterprise became large not merely by expanding its size—which the trend towards domestic mergers at the end of the nineteenth century facilitated—but also by broadening its scope through horizontal and vertical integration (Chandler, 1980). The consequence was that not only did productive assets in many industries become concentrated in a few large business firms, those few large business firms that inherited the foreign businesses of their predecessor companies became international companies from their existence. Many of these were resource-based companies.12 Thus, the same entrepreneurs involved in the creation of large domestic businesses led the expansion of American businesses abroad, seeking markets and raw materials in foreign lands. Outward FDI in turn afforded another route by which these large American companies further increased their size and scope. Fourth, actions by the United States government also favoured the growth of international production by American firms, particularly in resource-based industries. For example, the duty free status accorded to Canadian newsprint in 1911 as a result of strong pressures from American newspaper publishers, combined with the industrialization policy of Canada which encouraged local processing of Canadian natural resources made lumber and paper and pulp mills account for at least one-third of American FDI in manufacturing in Canada in the period between 1897 and 1914.13 Similarly, the establishment of smelters across the Rio Grande was a profitable venture for many American investors as a result of the passage in the United States of the McKinley tariff in 1890 which imposed new duties on the exports of lead ores to the United States. The duty free status accorded to Cuban sugar under the McKinley tariff and other actions by both the Cuban and American governments also led to the growth of American FDI in the Cuban sugar industry—the most important industry for American FDI in that country.14 In addition, the worldwide surge in demand for rubber from the early 1900s led President William McKinley to encourage American firms to cultivate rubber overseas to meet the domestic requirements of the United States. This stimulated the growth of American investments in Mexican rubber and by 1912 Americans controlled 68 per cent of Mexico’s rubber business (Schell, 1990; Wilkins, 1970). Host country-specific factors Locational advantages of host countries favoured the international expansion of American firms in the mining, manufacturing, petroleum and agricultural industries in the

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post-Civil War period until 1914. In the case of those firms in the resource-based industries, the presence in foreign lands, particularly in neighbouring countries, of rich and abundant natural resources, including those that were not available in the United States or were available at lower costs, low labour costs and the provision of favourable incentives by host country governments to foreign investment, posed profitable FDI opportunities for the largest American mining, agricultural and petroleum companies. The lower costs of minerals prospecting and development in Mexico, for example, was associated with lower capital investments by American companies when compared to the size of their capital investments for similar activities in the United States.15 In these industries, American companies dominated domestic production in their host countries and, in some cases, became the world’s largest producers. For example, large copper companies based in the United States—the world’s leading producer and consumer of copper—secured world leadership in that industry in part by their control of rich foreign ore deposits in Mexico, Canada and South America. In 1911, the three largest American copper groups combined controlled 48 per cent of world copper refining output (Schmitz, 1986). In a similar fashion, the Canadian Copper Company established by the American entrepreneur Samuel J. Ritchie eventually became the world’s largest nickel producer (Wilkins, 1970). In other cases, the dominant participation of American companies enabled the host countries to become the world’s largest producers. For example, American investments enabled Mexico to surpass the United States as the world’s largest silver producer in 1902 and the second-largest copper producer after the United States in 1904 (Jones, 1996). American investments also enabled Mexico to become the world’s third-largest oil producing country in 1911, following the United States and Russia (Wilkins, 1970). In the case of market-oriented American FDI particularly significant in Canada, Europe and, at a later period, Japan, the high incomes of those countries, their growing demand for American products and the emergence of a competitive fringe of local firms producing similar products which posed a threat to the continued growth of the American firm through exports were the fundamental locational determinants favouring international production. The product cycle model considered these factors to be important in explaining the growth of international production of American manufacturing firms in Europe in the immediate period after the Second World War (Vernon, 1966), but evidence presented in this chapter and the next trace the relevance of the same set of factors further back to the emergence of American manufacturing MNCs prior to 1914. Apart from the traditional location-specific variables related to the presence of abundant natural resources, low labour costs and large and rapidly growing foreign markets, actions by foreign governments in important export markets in the form of incentives to FDI or obstacles to exports or particular value-added activities by MNCs favoured the decision to either switch from exports to international production or to engage in higher value added activities in their foreign operations. These were of different kinds. First, there were nationalistic policies of foreign governments involving the imposition of tariffs, the demand for local production of imports, or local processing of extracted raw

The emergence of multinational corporations from the United States: the period until 1914 materials that provoked American businesses to engage in international production in Canada, Europe and Japan. Foreign customs duties which made imports uncompetitive with locally produced goods prompted international production behind tariff walls. American manufacturers of sewing machines, cars, car accessories, rubber goods, harvesters, radiators and enamelware established factories to sell within the Dominion in order to avoid full customs duties. Similarly, differential customs duties encouraged foreign petroleum refining by American firms. Through international production, such companies were able not only to overcome tariff barriers but also to meet existing or, more often, preclude potential competition. Furthermore, insistence by foreign governments in Europe for local purchases of equipment stimulated American firms in the electrical industry to produce in Europe, for example. The industrialization policy of Canada which encouraged local processing of Canadian natural resources favouring the expansion of American FDI in the Canadian paper and pulp industry was already mentioned. Similarly, nationalist sentiments and special product needs abroad prompted American firms to manufacture in a foreign country. Indeed, the international production of American companies in the oil, tobacco, electrical equipment, car, and fertilizer industries was influenced by host government tariffs, preferences for national businesses, support of local cartels, etc. In these industries American firms were affected profoundly both by Canadian and European business and political conditions. The sensitivity of some American businesses abroad to local traditions and their respect for local jurisdictions and policies was manifested in part in the hiring of local personnel, the purchase of local supplies and the adoption of ‘national’ titles. This was true of many American manufacturing firms that invested in Canada (Wilkins, 1970). Second, foreign government action in the form of rigid patent requirements particularly in Canada and Germany forced compliance by American firms in order to maintain their businesses. Patent laws require that local manufacture be initiated and rendered adequate to meet the demands of the local market within a set period of time (three years in Germany and two years in Canada) from the date of the patent grant. This prompted the American controlled Bell Telephone Company of Canada, for example, to begin to manufacture telephone equipment in Montreal in 1882. Third, the introduction of unilateral concessions to goods made in the British empire affected the growth of American FDI in Canada. The Canadian expansion of the Ford Motor Company was planned on the basis of preferential trading arrangements within the empire. Fourth, host governments in Mexico, Canada and the Caribbean offered incentives in the hope that their economies would benefit from the influx of American capital. To encourage economic growth, Mexico not only extended subsidies to American railroad companies, but also implemented favourable mining laws, offered tax incentives to new foreign enterprises, and cancelled import duties on materials for mills and smelters and provided police protection to mining projects and plantations. In addition, many of the export levies on silver and gold, imposts on certain business transactions, and property taxes could be reduced or waived through negotiated concessions. The Canadian

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government likewise extended subsidies, loans and bounties to American investors. The Chilean government also encouraged American capital and expertise in line with the country’s objective to regain its position as the world’s largest copper producer. Indeed, with the large American capital stakes eventually invested in Chilean copper, that country obtained more American capital than any other South American country before the First World War. The favourable tax incentives provided in the Peruvian Mining Law of 8 November 1890 also led to the influx of large American capital to exploit and develop Peruvian mines, particularly copper, vanadium and gold.16 Many Caribbean governments also gave concessions to new American businesses, including low taxes, land, and freedom of workers from conscription (Wilkins, 1970). The subsequent sections examine more closely the emergence of American MNC activity in each of the mining, manufacturing, petroleum and agriculture industries in the period until 1914. American participation in foreign mining As mentioned, the development of foreign railroads paved the way for the growth and development of new business ventures including mining, particularly in Mexico and South America. The railroad enabled travel to remote mining districts, lowered freight charges on the transport of ores from the mines, and made feasible the introduction to the mining regions of bulky and heavy modern machinery (Wilkins, 1970). In the period before the end of the nineteenth century, mining and smelting was the second largest sector of American FDI after railroads accounting for some 21 per cent or $134 million of American FDI in 1897. Since that time and until 1914, the large capital requirements of mining prospecting and development made the mining and smelting sector surpass railroads and become the most important sector of American FDI, with a share of some 27 per cent of American FDI in 1908 and 1914. By 1914, American FDI in mining and smelting reached $720 million.17 As with American investments in foreign railroads, American businesses that ventured abroad in mining and smelting tended to concentrate in the neighbouring areas, particularly Mexico, Canada and South America. These areas accounted for some 95 per cent of all American FDI in this sector between 1897 and 1914. Mexico received the dominant share of American FDI in the mining and smelting sector in the period until 1914. The establishment of the Mexican railways system combined with the attractive business opportunities posed by the rich and undeveloped Mexican mineral resources particularly of silver, gold, lead, zinc and copper as well as coal led to the influx of hundreds of American mining companies in Mexico. These location advantages combined with the lower costs of minerals prospecting and development and various forms of host government incentives and the nationalization of the key railroad lines between 1903 and 1909 made the mining and smelting sector surpass the previously dominant share of railroads and become the most important sector of American FDI in Mexico by 1908. Thus, although in 1897 railroads accounted for the largest share (56 per cent) of American FDI in that country, by 1908 mining and smelting accounted for that share. The early American mining ventures in Mexico often took the form of acquisition

The emergence of multinational corporations from the United States: the period until 1914 of old abandoned mines from Mexican owners. Canada was the second largest recipient of American FDI in mining and smelting in the period before 1914, at least until the South American mines were discovered. The richness of Canada’s mineral resources encouraged many American entrepreneurs to acquire interests in mining copper, nickel, iron ore, asbestos, lead, zinc, coal, gypsum, manganese, antimony and phosphate and precious metals such as gold and silver. In a majority of cases the mining investments made by American entrepreneurs took the form of the establishment or acquisition of small companies, some of which were incorporated in the United States and some in Canada.18 The development of South American mines by American firms made that region an important recipient of American mining FDI by 1914, with a share of more than 30 per cent. American interests in South American mining and smelting before the end of the nineteenth century were small and many were short-lived.19 Indeed, the region accounted for less than 5 per cent of American FDI in mining and smelting worldwide in 1897. Some of the mining stakes evolved from the activities of traders. The presence of rich mineral resources in the region combined with the development of the American capital market by the early 1900s made the mining and processing of various ores account for the largest share of American capital in South America in the period from the early 1900s to 1914. The vast copper resources of Chile and Peru made these countries the most important recipients of American FDI in mining and smelting in the region at the turn of the century. In these two countries American companies developed the richest copper properties and American capital came to dominate the copper mining industry.20 It also enabled South America to become the second largest recipient of American FDI in mining and smelting by 1914, after Mexico. Indeed, the region became associated with mining for American firms. As mentioned, this sector accounted for $221 million or 68 per cent of American FDI in that region in 1914—a considerable increase from the $6 million invested in the industry in 1897 (Table 2.1). For the most part, the output of foreign mines served to supplement the domestic mineral resources of the United States. Thus, the activities of American mining MNCs involved primarily the extraction of mineral ores to be exported in an unprocessed state to the United States for smelting and refining.21 The smelting of mining ores alongside the extraction of minerals occurred only in a major way in Mexico and Chile. The smelting operations in Mexico were a response to the passage in the United States of the McKinley tariff in 1890 which imposed new duties on the exports of lead ores into the United States as mentioned, while that in Chile was encouraged by the introduction of the flotation process in 1912 as a new technique for concentrating copper ores which facilitated mechanization and the simplification of tasks that could be matched with semi-skilled, low-cost labour (O’Brien, 1989).22 The processing of Mexican and Chilean ores usually went only so far as smelting, then the product would be exported.23 With the ascendance of mining and smelting as the most important American FDI in Mexico in the early 1900s, the United States increasingly looked at this country as the most important and convenient ‘across-the-border’ source of supply for minerals.

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Investments by American manufacturing firms or their stockholders in overseas sales organizations and branch factories The manufacturing sector accounted for between 15 and 18 per cent of the stock of American FDI worldwide between 1897 and 1914 (Table 2.1). It was the third-largest sector after railroads and mining in 1897, but since the early 1900s it became the secondlargest sector after mining by size of investment. However, the largest number of foreign stakes of American-controlled international corporations in the period prior to 1914 was in the direction of sales and manufacturing. Indeed, the much larger capital investments required in multinational extractive and agricultural holdings meant that there were far fewer American-controlled international corporations in these activities compared with those that had sales or manufacturing stakes (Wilkins, 1970). At the turn of the century, the new wave of American corporations that engaged in foreign expansion through export marketing and international production invested mainly in their most important foreign markets—Canada, Europe and, after 1899, Japan where per capita income was high and the ability to consume was great.24 Some three-fifths of American FDI in sales worldwide and 96 per cent of American FDI in manufacturing worldwide in industries other than petroleum were directed to Canada and Europe in 1897. Largely owing to the consideration of the Canadian market as an extension of the American market, Canada was the single most important host country for international production by American firms—accounting for between 46 and 59 per cent of American FDI in the manufacturing sector worldwide between 1897 and 1914. Europe, however, was a far more significant host country than Canada for American FDI in sales. The influx of American manufactured goods in Europe between 1897 and 1902 raised concerns about an American invasion of Europe of which the works of McKenzie (1901), Stead (1902) and Thwaite (1902) provide an indication.25 The geographical concentration of foreign sales and foreign manufacturing activities by American firms in the marketrich economies of Europe, Canada and Japan was different from that of American businesses that ventured abroad to build railroads or search for natural resources. As seen in the previous sections, the latter investments generally gravitated towards the resourcerich neighbouring countries of Mexico, Canada, South America and the Caribbean. The analysis of American FDI in manufacturing which follows begins with the earliest investments in the pre-Civil War period, followed by those in the period since 1865 with the emergence of sustained American FDI in foreign branch factories. Investments in overseas manufacturing in the pre-Civil War period In the period between 1800 and 1860, there were investments by American manufacturing firms or their stockholders in overseas branch factories to supply a foreign market. As mentioned, the rapid development of American technology in certain metallurgical industries (machine tools, guns, reapers, and sewing machines) in the 1850s, linked with mass production in which the United States had already acquired world leadership, explain the pioneering role of American metallurgical firms in

The emergence of multinational corporations from the United States: the period until 1914 international production. The emergence of ‘classic’ or modern American MNCs—firms which had grown in the domestic market owing to their managerial and technological competences prior to embarking on international expansion—can be traced to the preCivil War period. The first foreign manufactory of an American company was that of Samuel Colt in London, England in 1852. This foreign manufactory of firearms is regarded to have been the first foreign branch plant of any American company (Wilkins, 1970). The motive behind its establishment was to protect the firm from unfair competition as a result of the introduction of counterfeit firearms in England where the firm had no patent. The second foreign manufactory of an American company was that of J.Ford and Company that built a factory for vulcanized rubber in Edinburgh, Scotland in 1856. The motive behind its establishment was the opportunity to earn higher profits from foreign expansion and to prevent the exploitation of a patent in Scotland where English patents were not protected. In the product cycle model, the emergence of a competitive fringe of local firms in relatively advanced follower countries that are able to catch up through the imitation of innovation of the technologically leading American firms is one of the factors associated with the growth in demand for a ‘maturing’ product in these countries. The threat to the large-scale export business in the form of local competition becomes a powerful ‘galvanizing force’ for the initiation of import substituting international production by American firms (Vernon, 1966). The establishment of these two foreign manufactories—although unprofitable and eventually sold to British interests—were exceptional American FDI in foreign branch factories before the Civil War. There appear to have been no others (Wilkins, 1970).26 The period since 1865 The level of American FDI before the Civil War was generally low because rapid means of transportation and communication both within the United States as well as between the United States and foreign countries had not been developed fully to enable domestic firms to explore new and wider markets. The period since the American Civil War brought sweeping changes in the development of domestic and foreign transportation and communication facilities.27 As mentioned, the development of railroads in the United States enabled domestic companies to become national firms as distinct from local, state or regional firms. It was American companies with national sales plans and unique products that discovered the attractions of business abroad and were the first to be successful in undertaking such activities (Wilkins, 1970). This was associated closely with the beginning of the era of Pax Americana with the pioneering role of American firms in the second generation of industrial discoveries around the 1870s which encouraged the development of fabricating industries such as motor vehicles, office machinery, electrical goods, synthetic chemicals and others. This was unlike the technical and organizational advances of the First Industrial Revolution which led to the development of processing industries in which the United Kingdom had the technological hegemony (see Chapter 7). The Second Industrial Revolution exerted major repercussions on the organization of production as the development of fabricating

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industries required more hierarchical organizations to operate successfully and the modern industrial company grew both by horizontal and vertical integration (Chandler, 1980). As the process of firm growth encompassed integration across national boundaries, the implications of the later technical and organizational advances became truly transcontinental. Plans for the further growth of the American industrial firm through international expansion sometimes coincided with, initiated shortly after, or long delayed after national plans. Inventors (such as Thomas Edison and Alexander Graham Bell) and manufacturing companies sought not only to cater to but also create foreign demand on the basis of their strengths in making new and innovative products, manufacturing methods, sales and advertising techniques. Unlike foreign investments to obtain sources of supply or raw materials, foreign marketing investments involved typically only small amounts of capital investment, if any; and could be initiated and maintained with virtually no outflow of capital from the United States. In fact, should additional capital to support export growth be required, as in the case of some American firms in the electrical equipment and film industries, such funds were raised typically abroad. Generally, the foreign activity of American manufacturing firms in Europe or Canada tended to be either forward integration into sales or horizontal integration in manufacturing, but over time the former kind often led to the latter kind. The initial foreign investments established by American manufacturing (and also petroleum) companies in the period after the American Civil War were mainly marketing or sales oriented—made primarily to broaden markets, obtain better control over distribution, meet competition as well as to avoid national business cycles (Wilkins, 1970). This conforms with the product cycle model that suggests that the growing demand in other relatively advanced countries for American products are first served typically through exports on account of the lower costs of domestic production and transportation compared to the costs of establishing a production facility in the export market. Although most international extensions by American firms were in marketing, some companies began to manufacture and to refine outside the United States during this period. As mentioned, the initial forays in foreign marketing activity often led to the later expansion of finishing, assembly manufacturing or refining abroad, as there were instances when merely to have a stake in a foreign sales establishment was insufficient to meet the objectives of the firm and the foreign market. The precise reasons for this varied across firms. Sometimes international production was made to save on costs associated with transportation, warehousing and domestic production, to obtain superior customer service and avoid damage in shipping. However, the decision to engage in international production was often spurred by the emergence of a competitive fringe of local firms producing similar products and the nationalistic policies of foreign governments in important export markets which made the costs of exporting more expensive. Similar reasons have explained the growth of American FDI in Europe in the 1960s in the product cycle model (Vernon, 1966). Generally, each factory served the particular foreign country in which it was located, except in the case of resource-based manufacturing in Canada, Mexico and South America that was geared towards exports to the United States and sometimes also

The emergence of multinational corporations from the United States: the period until 1914 Europe. Other American firms in Canada had broader goals. Some started in the Dominion in order to cater to British empire markets and hence take advantage of expected preferential duties (as in the case of Ford Motor Company already mentioned), to use as a base for further foreign investment (the case of Sherwin-Williams whose Canadian affiliate owned the company’s English subsidiary), or as an export platform (the Canadian investments of International Harvester was prompted by the desire to sell to France after the Canadian—French commercial treaty of 1907). There were also investments prompted by the need to escape American antitrust legislation (the case of Alcoa),28 or to avail of tax incentives (in 1913 there were no corporate income taxes in Canada). These incidental uses of the Canadian subsidiary or affiliate rarely seemed to have been the fundamental motives, but nevertheless enhanced Canada’s advantages as a location for international production (Wilkins, 1970). There were also investments to sell services—mainly utilities and insurance—to cater to the needs of foreign consumers. Metallurgical companies continued to lead the way in international expansion in the period since the Civil War. Given that Singer was the first American-based corporation with investments in foreign branches, subsidiaries and/or affiliates in the period after the American Civil War, a brief account of the international business history of the company is of interest as a basis for comparison with other American MNCs in the manufacturing sector. Singer’s forays in international business developed gradually in a way that does not conform exactly to the product cycle model. The firm initiated its international business in 1855 by selling its French patent for the single-thread machine to a French merchant, Charles Callebaut, in exchange for royalties. Between 1860 and 1861, the company engaged in exports, mainly to independent franchised agents in Mexico, Canada, Cuba, Curaçao, Germany, Venezuela, Uruguay, Peru and Puerto Rico that sold and advertised Singer sewing machines. By this time Singer had also sent salaried representatives to Glasgow—the site of the company’s initial British sales headquarters for Great Britain and Ireland—and London. The London branch office soon became Singer’s British sales centre as well as the seat of extensive marketing programmes in England, Spain, Portugal, Italy, Belgium, and in the 1870s in France. In 1863, the company established branch offices in Hamburg and Sweden which enabled it to extend businesses throughout Germany, Scandinavia, Russia and Austria-Hungary. The firm built its first foreign factory in Glasgow in the spring of 1867 largely owing to the restoration of the American dollar to its normal specie value in the period after the Civil War and increasing labour costs in the United States, both of which rendered American exports uncompetitive. Furthermore, Singer expected major economies in domestic production costs, freight bills, storage and other incidental expenses with the establishment of its first foreign plant (Wilkins, 1970). The first factory in Glasgow was initially an assembly operation, receiving parts from America in a partly finished state. At first the orders were for 100 machines every other week. By 1869 the company required a larger factory, with tools sent to Glasgow to manufacture all the parts required to produce 600 machines a week. In 1872, an additional factory was established in Glasgow, and six years later the firm acquired additional space. All this expansion was the result of a continued growth in foreign

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demand for Singer sewing machines. Indeed, by 1879–12 years after the first factory opened—the foreign sales of Singer’s sewing machines produced in Glasgow outnumbered domestic sales (Carstensen, 1984). By the end of the 1870s Singer’s worldwide sales surpassed those of the former industry leader, Wheeler & Wilson. Singer had become pre-eminent in the industry both in the United States and worldwide, particularly by the 1880s as its vast foreign sales network and foreign manufacturing plants had been established.29 Singer’s commitment to expand abroad was not unique. In the 1870s and 1880s many American companies in the metallurgical industries sought export markets to dispose of surplus output and obtain economies of scale. This was true of companies producing screws, harvesters, cash registers, elevators, steam pumps, locomotives, locks and guns whose quality was superior to those produced and sold by European firms. Thus, many American metal products companies after having established national sales organizations created international sales networks in Canada and across the Atlantic which provided the most customers. Wilkins (1970) then describes an evolutionary pattern in the growth of the foreign business of most of these metal-working companies (although companies might skip a step or several steps in the process). In the first stage, the American concern sold abroad through independent agents (through an export person or export or commission houses in New York City) or on occasion filled orders directly from abroad. However, companies frequently started to export using the facilities of international trading firms. In the second stage, the company appointed a salaried export manager, an existing export agency and its contacts, or independent agencies in foreign countries to represent the company. In the third stage, the company either installed one or more salaried representatives, or a sales branch, or a distribution subsidiary abroad, or it purchased a formerly independent agent located in a foreign country. At this point, for the first time, the company made a foreign investment. In the fourth stage, a finishing, assembly or manufacturing plant might be established to meet the needs of a foreign market. By the mid– 1880s all these stages had emerged. In Canada, 47 verified American branch, subsidiary, or controlled affiliated manufacturers were established between 1876 and 1887, many of which were in the metal-working fields (Wilkins, 1970). While the process of growth of the foreign business of most metal-working companies conforms to the pattern described by Wilkins (1970), such a pattern does not describe the growth process of the foreign business of all metal-working companies, let alone the American manufacturing companies in other industries that also became international firms in the period before 1914. Indeed, the period between 1890 and 1914 described the international expansion of American firms in such diverse manufacturing industries as bicycles, cars, food and drink, electrical equipment, tobacco, films and pharmaceuticals, among other industries. An analysis of the history of international growth of some of these American companies suggests the following trends. First, the process of growth of international business varies across firms, and even within the same firm in different host countries. The case of the Ford Motor Company is an excellent case in point. Faced with high Canadian tariff barriers, the company—as with other American car companies or their affiliates that followed—started at once to

The emergence of multinational corporations from the United States: the period until 1914 establish its first foreign factory in Canada. However, the expansion of Ford in England conforms more to the model described by Wilkins above. There, the firm began with agents, before developing a sales branch, and an assembly plant in 1911–12, with a small amount of manufacturing. By 1914 the Model T had become the best seller in England. By then Ford also had a small assembly unit in France and, with a sales branch established in Argentina in that same year, it became the first American car company to establish a direct sales outlet in Latin America. Second, the sequence described by Wilkins (1970) may be reversed by some firms. For example, the Pittsburgh Reduction Company—the predecessor to the Aluminum Company of America (Alcoa)—started its initial foray in international business by building a plant in France in 1891–92 to enhance its competitiveness in Europe, however unsuccessfully. The firm then initiated aggressive marketing activity in Europe in the period after 1896, and in 1899 established a plant at Shawinigan Falls, Quebec, motivated in part by the Canadian tariff. To circumvent the Sherman Antitrust Act, the company also formed a new subsidiary in Canada—the Northern Aluminum Company—in 1900 to act on behalf of the American parent, including the handling of all the company’s export business and entering into accords with European aluminium producers to regulate foreign business. By 1912, Alcoa established a foreign subsidiary, Bauxite du Midi, a French bauxite company to procure raw materials, and by 1913 Alcoa was looking to South American sources of supply. The investment in foreign bauxite came after the company had been involved in international business for more than two decades. Increasingly, by 1914 certain American corporations were beginning to make both market-oriented investments (sales outposts, manufacturing plants and oil refineries) and supply-oriented investments (mines, oil wells and refineries, farms, packing plants, plus purchasing outposts, etc.) (Wilkins, 1970). Third, the growth process of international business described by Wilkins (1970) does not take into account the foreign licensing agreements that many American firms engaged in as part of their international business activities particularly in the early stages. In fact, the process of international growth of I.M. Singer & Company or its successor, the Singer Manufacturing Company, described above, showed that the firm initiated its international business in 1855 by selling its French patent to a French merchant, Charles Callebaut in exchange for royalties. Similarly, C.H.McCormick, discovering that exports of American reapers were not competitive in Europe, entered into a licensing agreement with the British firm, Burgess & Key, in 1851 to manufacture and sell reapers. The Edison Electric Light Company Ltd, formed in England in 1881, also had as its fundamental objective to sell, install and license sub-companies. There are other numerous examples of American firms that engaged in international licensing at the early stages of their international business. American participation in foreign petroleum The petroleum industry accounted for some 13 to 14 per cent of American FDI in the period between 1897 and 1914 (Table 2.1).30 Europe and Asia were the major recipients at the turn of the nineteenth century, but Mexico and South America also became

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important host countries in the 1900s. These four areas accounted for some 89 per cent of American FDI in the petroleum industry worldwide in 1914. The position of the United States as the world’s largest oil producing country through to the First World War (Jones, 1996) explains the high export propensity of the American petroleum industry.31 However, despite the increasingly dominant proportion of domestically refined oil that was exported, most of the exports continued to be sold in domestic transactions to independent export merchants or representatives of foreign importers in the 1860s and 1870s (Wilkins, 1970). It was not until the early 1880s that a more advanced stage in the growth of foreign business of American petroleum companies became evident. This was manifested in the integration of Standard Oil—the best known of all American-based international companies in petroleum—in export marketing and, in a limited number of cases, in foreign refining in response to the imposition by export markets of tariff barriers to refined oil or when there was keen local competition. A brief account of the expansion of the international business activities of this company is instructive. As will become evident, the evolutionary pattern in the growth of the foreign business of American petroleum companies conforms to that described by Wilkins (1970) for metal-working companies. In 1881, Standard Oil of Ohio—the first Standard Oil Company formed in 1870— acquired an interest in Meissner, Ackerman & Company of New York and Hamburg, a partnership of export merchants with a long history in the oil business. New York Standard, organized in 1882, acquired Ohio Standard’s earlier investment in Meissner, Ackerman & Company and through this company consigned the company’s refined products to Henry Funck & Co. in the United Kingdom. Waters-Pierce, a Standard Oil affiliate, also established an extensive marketing network in Mexico in the mid–1880s. In the mid–1880s with the increased competitiveness of Russian oil in Europe associated with the completion of the Baku-Tiflis line, Standard Oil responded initially by cutting prices, but when this proved inadequate, the firm strengthened its marketing organization in countries where the rivalry was strongest. Thus, foreign subsidiaries were established in the United Kingdom (Anglo-American Oil Company Ltd) and Germany in 1888 and 1890 to enable the firm to observe petroleum trade closely. In both countries, the affiliates marketed American refined oil and placed local business under the company’s direction and control. In addition, since the British affiliate found that it could handle the East of Suez oil trade more efficiently than the American companies, it began to consign in its name Standard Oil products to traders in the key ports East of Suez. The period 1893 to 1914 saw the Standard Oil companies handling the bulk of American oil exports. Unlike in the period until the mid-1880s, most of its foreign business was increasingly undertaken by its own companies abroad. The firm expanded its own foreign distribution networks through the establishment or acquisition of marketing firms that the firm owned in part or in whole. The result was effective control and management of its own distribution. There were fewer instances of the establishment or acquisition of foreign refineries by Standard Oil in the period before 1914. The establishment of the first foreign refinery by Standard Oil of Ohio in Galicia was recorded in 1879, but this was closed down in 1886 owing to antagonism against Americans by local producers. Waters-Pierce also began to

The emergence of multinational corporations from the United States: the period until 1914 refine imported Pennsylvania crude oil in Mexico City and Vera Cruz because of the high import duties on refined oil. Similar reasons prompted Archbold and Conill to establish two refineries in Cuba. These refineries in Mexico and Cuba were built with marketing considerations of the host country in mind. The establishment of foreign refining facilities to overcome local competition occurred in 1898 when Standard Oil bought a controlling interest (75 per cent of the stock) of Imperial Oil Company, a Canadian competitor company that had the largest Canadian refinery and a national marketing network in the 1890s. In turn, the acquisition by Imperial Oil Company of most of the companies and the plants affiliated with Standard Oil in the Dominion and the facilities of small competing refineries assured Standard Oil’s pre-eminent position in Canada. In sum, although Standard Oil had been pushed by competitive pressures in the 1880s and 1890s to extend its foreign investments, this consisted mainly of marketing and, to a lesser extent, refining. The amount of capital investment remained relatively small as the company had not yet made investments in the highly capital intensive foreign oil production. By the turn of the century, Standard Oil was a large MNC, and beginning for the first time to consider purchasing foreign oil-producing properties as well as buying foreign oil to supplement American supplies of oil. The company had established or acquired control of 55 foreign enterprises with an approximate capitalization of $37 million by the end of 1907.32 In most of these enterprises, Standard Oil held over 50 per cent of the stock, directly or indirectly. Although most foreign enterprises were for marketing, some were transportation facilities, some were refineries and two were fully integrated foreign producers. When in 1911 the United States Supreme Court ordered the dissolution of the Standard Oil monopoly into 34 separate companies, three of the nine companies that retained foreign facilities developed into the world’s largest oil companies, namely: Standard Oil of New Jersey (later known as Jersey Standard, Esso and Exxon), Standard Oil of New York (later known as Mobil) and Standard Oil of California. Jersey Standard obtained the largest foreign assets including the oil fields and refineries in Rumania and Canada, refineries in Germany and Cuba and the marketing network in Canada, Latin America (except Mexico) and Western Europe (except Britain). New York Standard, on the other hand, took over the Far Eastern oil distribution companies. Practically all the nine companies that retained foreign facilities continued to expand abroad after 1911 (Wilkins, 1970).33 Other American oil companies initiated foreign oil exploration activities beginning from the 1890s. Edward L. Doheny, an independent oil man from California, incorporated the Mexican Petroleum Company in California in 1890, and pioneered the exploration and discovery of Mexican oil in 1891.34 The success of Doheny’s Mexican Petroleum Company and the Mexican Eagle Oil Company owned by Sir Weetname Pearson—the largest oil company in Mexico—led to the further expansion of American and British capital investment in Mexican oil. No doubt stimulated by Doheny’s efforts, the Waters-Pierce Oil Company—one of the nine companies resulting from the dissolution of Standard Oil that retained foreign facilities—whose primary interests was in refining and marketing, acquired some oil lands in 1902. By 1908, with the ascendance of Mexico as an important site of oil extraction and processing, that country became the second largest recipient of American FDI in petroleum worldwide after Europe. By 1911

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Mexican oil production reached 34,000 barrels per day, more than half of which was American owned. As mentioned, this enabled Mexico to assume third place in the world’s oil industry in that year, following the United States and Russia. Between 1911 and 1914, many more American oil companies including the Texas company, Gulf Oil, and the Magnolia Oil Company began to invest in the prolific oil fields of Mexico. Neither civil strife, disorder, forced loans nor taxes associated with the Mexican Revolution starting in 1913 affected adversely the activities of American oil firms in Mexico. Challenged by wells that were then the most prolific producers in the world’s history, their production and exports mounted. South America also became an important region of American FDI in petroleum, particularly after 1900. Among the most important American petroleum investment in the region was that of Standard Oil of New Jersey in Peruvian oil production with the objective to sell to the west coast of South America. Other American petroleum investments were made in the nascent Colombian and Venezuelan oil industries. By 1914, American petroleum investments in the region surpassed that in Asia and reached $42 million, or more than 12 per cent of American FDI in petroleum worldwide. Although the share remained small, the investments paved the way for larger petroleum investments by American firms in the region in the decades to follow. American participation in foreign agriculture Agriculture was the fifth most important sector of American FDI before the end of the nineteenth century, accounting for some 12 per cent of American FDI worldwide in 1897. The relative importance of the sector was maintained until 1914. As with American FDI in railroads and mining and smelting, the bulk of American FDI in agriculture in the period until 1914 was directed to nearby regions, namely, Cuba and other West Indies, Canada and Mexico. These areas accounted for between 79 per cent and 84 per cent of American FDI in agriculture worldwide between 1897 and 1914. By 1914 Central America also became a significant recipient of American FDI in agriculture accounting for a share of more than 10 per cent, making the region as important to American agricultural FDI as Mexico. Competition in local agricultural businesses in these nearby regions was often among several American firms or among American and European firms rather than with local firms. Agriculture was the most important sector of American capital in the Caribbean even before 1898. With an average share of some 50 per cent of American FDI in agriculture worldwide between 1897 and 1914, the region received the largest share of American capital investments in agriculture because of the richness of its natural resources, its proximity to the United States and the provision of American tariff preferences particularly with respect to Cuban sugar. Indeed, in the less developed Caribbean regions, Americans went mainly in search of tropical agricultural produce. Sugar and tobacco were the most important recipients of American FDI in the region and particularly in Cuba at the conclusion of the Spanish—American War. Tropical fruit was also another important area of American FDI in agriculture in the region, with the United Fruit Company being a major investor. Much of the early American FDI in the sector was

The emergence of multinational corporations from the United States: the period until 1914 made by American commodity traders that integrated into agriculture, particularly bananas and sugar. Only the rare agricultural stakes in the region were made by American industrial companies integrating backward into agriculture production (Wilkins, 1970). The business history of the United Fruit Company provides an excellent case study of the international expansion of an American firm through backward and forward integration. While its predecessor company—the Boston Fruit Company—acquired the bulk of its fruits through purchases from independent farmers in Jamaica which were then shipped and sold in Boston, the United Fruit Company as it evolved in 1887 engaged in backward vertical integration by acquiring four banana plantations spanning 1,300 acres in Jamaica, and 40,000 acres in Santo Domingo in order to secure a reliable source of fruit. With the formation of the United Fruit Company in 1899 the business owned or leased over 320,000 acres of land in the Caribbean, including Jamaica, Cuba, Costa Rica, Colombia and Nicaragua—properties previously acquired by the Boston Fruit Company and Minor C.Keith, First Vice-President of the company. By 1913, the company owned or leased 852,560 acres, of which 221,837 acres were under cultivation. Although the land was used primarily for the cultivation of bananas, it was also used for the cultivation of orange groves, coconut trees, rubber trees, sugar, cacao as well as the raising of cattle. The dispersion of its properties throughout the Caribbean enabled the firm to spread the risks associated with natural calamities, banana disasters as well as revolution, riot and political unrest. To support these investments, the company invested heavily in infrastructure by installing drainage and water systems and radio communications, and establishing company towns and hospitals in former jungle areas. The company also integrated further into transportation not only by steamship but also through ownership of railroads as previously mentioned or contracts with existing railroads to facilitate the efficient transport of its perishable products (Wilkins, 1970). The fruits cultivated by the firm were shipped primarily to the United States, but the firm also began to ship fruits to Europe facilitated by its acquisition in 1904 of a large stake in Elders and Fyffes—the leading firm in the European banana trade—and its acquisition of full control in 1913 (Davies, 1990). The integration of the company into fruits cultivation and transportation, with the former enhanced by the introduction of mass production cultivation techniques, enabled the company to become increasingly independent in the supply of its own fruits rather than continue to become dependent on relational contracting with independent companies engaged in fruit production or transportation. Using internalization theory as applied in the case of international production, unified governance provided the most efficient means with which transactions could be organized, involving lower costs compared with those of a market exchange.35 As firms increased in size and scope, the banana industry became organized increasingly as an oligopoly with stiff barriers to entry (Read, 1983, 1986). Investments in foreign agriculture assumed further importance for American firms and the American economy around the early 1900s. This was associated with the worldwide surge in demand for rubber from the early 1900s, and the encouragement provided by President William McKinley to American firms to cultivate rubber overseas to meet the

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domestic requirements of the United States. Although this led to the emergence of American FDI in rubber, particularly in Mexico and Brazil, the investments then were regarded as speculative (Wilkins, 1974). Canada was the second most important host region, accounting for 23 per cent of American FDI in agriculture in 1897, and although that share declined to 13 per cent in 1908 owing to the surge of American agricultural investments in Cuba and the West Indies, Canada’s share of American agricultural FDI grew to more than 28 per cent in 1914 (Table 2.1). Unlike in the Caribbean, where American agricultural investments were directed to sugar, tobacco and a variety of tropical fruits (primarily bananas), and in Mexico where American agricultural investments was directed to rubber, chicle, cattle and some tropical fruits, American capital investments in the primary sector of Canada were mainly in timber and timberlands.

Conclusion The period until 1914 was associated with the emergence of American MNCs. With the exception of Standard Oil of New Jersey, Singer Manufacturing Company, International Harvester, New York Life and perhaps a handful of other large companies, many American firms had obtained a foreign stake in only one foreign country before 1914, and international business did not make a substantial contribution to the profits of American enterprises (Wilkins, 1970). Before the end of the nineteenth century in 1897, the major host countries for American FDI were Mexico (with a share of 31 per cent of the stock of American FDI worldwide), Canada (25 per cent), Europe (21 per cent), the Caribbean (11 per cent) and South America (6 per cent). These countries continued in the same order to be the five largest recipients of American FDI by 1908. The primacy of Mexico as a host country until 1908 was associated with the importance of railroads as one of the pioneering sectors of American FDI in 1897 followed by, and associated with, mining and smelting in 1908. In both of these most important sectors of early American FDI, Mexico was the most important host country. By 1914, American stakes in Mexican oil production was also growing rapidly. The other nearby developing regions in the western hemisphere— the Caribbean islands, Central America and South America—were also important recipients of supply-oriented investments by American MNCs in the period until 1914. While American FDI in the Caribbean and Central America was concentrated in agriculture (sugar, fruits, rubber, tobacco, etc.), that in South America was concentrated in mining. By contrast, the substantial American FDI in Europe until 1914 was concentrated in refining and distribution of petroleum and in the manufacturing sector. Petroleum was the leading American industry in Europe in 1897, accounting for some 42 per cent of the stock of American FDI in the region, followed far behind by manufacturing with a share of 27 per cent. By 1908, the relative importance of both these sectors was about equal at 27 per cent, but by 1914, manufacturing surpassed petroleum in relative importance with shares of 35 per cent and 24 per cent of the stock of American FDI in the region,

The emergence of multinational corporations from the United States: the period until 1914 respectively. The high per capita income of the European consumers, their growing demand for American products, the imposition of trade barriers, and the emergence of a competitive fringe of local firms favoured the expansion of American MNCs in European manufacturing. This provides evidence of the relevance of the product cycle model— formulated primarily to explain the growth of American MNCs in Europe in the immediate period after the Second World War—to explain the emergence of American MNCs prior to 1914. Changes in the relative importance of host countries became evident in 1914, when Canada surpassed Mexico as the largest host country of American FDI, but the relative position of the other host countries remained unchanged. The geographical proximity of the Dominion combined with its high per capita income and imposition of trade barriers led American companies to expand and secure markets through the establishment of a large number of American manufactories in Canada. In addition, the proximity and the presence of rich natural resources there meant that the country also became a convenient and important source of mineral and agricultural supplies (particularly timber) for American firms. These reasons, combined with the difficulties encountered by American businesses in the civil war in Mexico between 1911 and 1914, led to the curtailment of many American businesses in that country, particularly in mining and agriculture. Only petroleum investments in Mexico continued to flourish. American FDI in more distant areas—Asia, Oceania and Africa—in the period until 1914 was more limited, owing largely to the large risks and costs associated with investments in areas of farther geographical distance, the inaccessibility to American firms of the European colonies in Asia and Africa, low incomes (Asia other than Japan, Oceania other than Australia, Africa), and small markets (Oceania) (Wilkins, 1970). The principal industries of American FDI in 1897 were railroads (23 per cent of the stock of American FDI worldwide), mining (21 per cent), manufacturing (15 per cent), petroleum exploration, production, refining and distribution (13 per cent) and agriculture (12 per cent). By 1908, railroads descended to become the fifth most significant industry of American FDI, and the other industries moved up one notch in importance in the same order. Thus, mining ascended to become the most important activity of American MNCs abroad with a share of more than 27 per cent, followed far behind by manufacturing (18 per cent), petroleum (14 per cent) and agriculture (11 per cent). The same order of importance was maintained until 1914, except that the significant expansion of American FDI in agriculture at the time led to that sector surpassing petroleum in importance and becoming the third largest industry of American FDI abroad in 1914. In addition, the continuing position of the United States as a significant oil exporter made American FDI in petroleum until 1914 remain primarily in distribution and, to a lesser extent, some refining in consumer countries, although some oil companies had begun to make some investments in foreign oil extraction from the end of the nineteenth century. The ascendance of mining as the most important sector of American FDI at the beginning of the twentieth century until 1914 is associated with the large capital requirements involved in the initiation of mining projects. This is not a feature that is associated with the emergence of American FDI in the manufacturing sector where investments have grown gradually, in many cases on the basis of reinvested profits.

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Nevertheless, despite the smaller size of American FDI in the manufacturing sector compared to that in mining in the period until 1914, the foundations had been laid for the expansion of American FDI in the manufacturing sector in subsequent periods.

Notes 1 Based on data obtained from UNCTAD (1999). 2 Such was the case of the New York merchant John Van Cortlandt, who, when planning to send some 3,000 bushels of wheat from Virginia to Madeira, notified Newton & Gordon, a British concern in Madeira, to sell the wheat and ship the proceeds in good Madeira wines (Wilkins, 1970). 3 For example, the American-born Francis Wilks served the Boston merchant Thomas Hancock in England in the 1730s, followed by Christopher Kilby in 1740. These merchants also represented the Massachusetts Colony in London, combining business and politics (Wilkins, 1970). 4 Sons, cousins, nephews and brothers of the head of the firm went to Jamaica, Curaçao, Antigua, St Eustatius, St Croix, and other islands in the Caribbean to serve the New York houses of Lloyd, Ludlow, Cruger, Livingston, Van Ranst, Cuyler, Beekman and Gouverneur (Wilkins, 1970). 5 For example, defaults on loans extended by American merchants to local (usually Spanish) sugar dealers and sugar estate owners after the end of the Cuban war in 1868–78 led to the emergence of American stakes in Cuban sugar plantations. A case in point is the Atkins family involved in Cuban sugar trade since 1838. By 1882 E. Atkins & Company obtained land holdings owing to a default on a debt to the company by a sugar estate owner (Wilkins, 1970). 6 The flotation of loans was made in association with Baring Brothers, J.P. Morgan and Morton Rose & Company (Wilkins, 1970). 7 The ownership of railroads wherever the United Fruit Company planted or purchased bananas was made to overcome the risks of market failure in the transportation of the rapidly perishable fruit to their final markets. Thus, whereas in its early years the United Fruit Company owned only 71 miles of railroad in the Caribbean, the company had a total of 669 miles of railroad in Costa Rica, Guatemala, Honduras, Panama, Colombia, Cuba and Jamaica by 1914. Including the 163 miles of track of the Costa Rica Railway Company operated by Northern Railway, the United Fruit Company controlled some 833 miles of railroads in tropical America. The Cerro de Pasco Mining Company also had to build 83 miles of railroad to connect with an existing line in the process of mining the ore bodies in the Peruvian Andes which was rich in copper, silver, lead, gold and other minerals (Wilkins, 1970). The Guggenheims similarly added railroads to their Mexican and Chilean holdings to support their extraction and smelting operations in those countries (O’Brien, 1989). 8 American capital was the predominant source of capital in the construction of railroads in Mexico. The other main sources of finance in the construction of foreign railroads was Europe (United Kingdom, Spain and Germany) in the case of the

The emergence of multinational corporations from the United States: the period until 1914 Caribbean countries and South America, and the United Kingdom in the case of Canada (Wilkins, 1970). 9 Other examples of American capital investments in railroads were those of the Sonora Railway Company (formed by a group of Boston capitalists) in Mexico to break the monopoly of Collis P.Huntington by providing an alternative route to the American West through the extension of the Atchison, Topeka and Santa Fé to the Pacific Coast. In 1881 Huntington and Southern Pacific interests obtained a concession. Over time, Jay Gould, Russell Sage and E.H. Harriman among others made investments in Mexican railways. Similarly, the American railroad entrepreneurs (Erastus Corning, John Murray Forbes and John W.Brooks) invested in the Great Western Railway in Canada in 1849–50 with the objective of establishing a connection between New York Central and the Michigan Central Railroads. The same can be said of the investments by the Northern Pacific Railroad which sought to obtain a Canadian charter to extend its railroads into the Canadian prairies as well as to construct a railway in eastern Canada to connect with the Vermont Central, providing the company with a route to Boston via Montreal (Wilkins, 1970). 10 The largest American capital exports were made in the years between 1898 and 1901 but the United States continued to be a net capital exporter through 1905 even though it remained a debtor nation on international accounts (Wilkins, 1970). 11 For example, technological innovations by American firms in the copper industry since 1879 eventually made possible for the first time the profitable mining and smelting of low-grade ores in Chile. This, combined with the high price of copper in 1904 and the risk-taking nature of American entrepreneurs in their roles as industrialists and financial capitalists, stimulated the interest of American companies in copper mining in Chile (Wilkins, 1970; O’Brien, 1989). 12 Some of these firms were the American Smelting and Refining Company, International Paper Company, International Nickel Company, United Fruit Company, and the General Asphalt Company (Wilkins, 1970). 13 In 1886, the Dominion government raised the export duty on timber to encourage domestic sawmill construction. In 1897, the Ontario government insisted that all timber logged on Crown lands in that province be manufactured in Canada; this prompted the building of American mills in Ontario. Next came the prohibition by the Ontario government on the export of pulpwoods from the Crown lands in 1900, followed by the Dominion Parliament which forbade pulp wood export from Dominion Crown lands in the Prairie provinces in 1907. Other provinces followed suit: Quebec (in 1910), New Brunswick (in 1911) and British Columbia (in 1913) (Wilkins, 1970). 14 The Platt Amendment to the Army Appropriation Bill of 1901, the Cuban constitution drafted in late 1901, and the treaty between Cuba and the United States in 1903 allowed for the intervention of the United States in the preservation of Cuban independence and in the maintenance of a government adequate for the protection of life, property and individual liberty (Wilkins, 1970). 15 A ton of ore could be mined in Mexico for 40 per cent of the cost of mining similar

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ore in the United States, assuming that the American miner did twice as much manual work as a Mexican miner (Wilkins, 1970). 16 The Law specified that for 25 years (or until 1915) there would be no new taxes or tax increases in the mining industry (Wilkins, 1970). 17 Since the development of mines required large amounts of capital, typically a few Americans would form a syndicate and raise money from a number of investors or seek funds from Boston or New York financial houses (Wilkins, 1970). 18 Among the most important American investors in Canadian mining between 1870 and 1914 was the Orford Nickel and Copper Company organized in March 1878 after several Americans acquired a mining property in Orford, Quebec in 1877. This small company developed the first Canadian nickel deposits to be used commercially. In 1881, Samuel J.Ritchie established the Canadian Copper Company as well as the Anglo-American Iron Company in Ohio to handle the Canadian business. With the recognition that its mines possessed both nickel as copper, the Canadian Copper Company became eventually the world’s largest nickel producer. In the merger movement occurring in the United States at the turn of the nineteenth century, the $24 million International Nickel Company was formed in New Jersey in 1902 from the merger of the Canadian Copper Company, the Orford Nickel and Copper Company and some other companies. By 1910, American capital also came to dominate the asbestos industry in Canada when the Johns-Manville Company of New York acquired control of a leading Dominion asbestos company. Other significant participants in Canadian mining were the Guggenheims whose interests were in precious metals (Wilkins, 1970). 19 Evidence for this is found, for example, in Alsop & Co. that lost substantial holdings in Bolivian mining when Chileans occupied the Bolivian silver mines at Caracoles in 1879. A handful of Americans began to mine gold in Ecuador in the 1880s, but these were short-lived activities (Wilkins, 1970). 20 The first large-scale American capital investment in mining in South America was that of William C. Braden who acquired the Rancagua low-grade copper mine in north central Chile in 1904 for f 100,000. Braden acquired the property on the basis of $625,000 raised on the preference shares of his company, which was also used to build a 35-mile road, establish a community and construct a concentrating plant and a hydroelectric plant. The Chilean investment of W.C.Braden was especially important because of the large size of its initial investment for the period, its long history and the fact that it was the first major entry of American capital into the Chilean copper mining industry—an industry in which Americans played eventually a pre-eminent role. While Braden succeeded initially in developing the mine on his own, he eventually turned to the Guggenheims for financial support. As a result, the Braden Copper Company was established by the Guggenheims in 1908 with a capitalization of $23 million. With the introduction of new techniques, El Teniente—the principal Braden mine—was the first copper company in the world to utilize the flotation process in concentrating low-grade copper ores. The success of this process enticed the Guggenheims to seek more copper properties in Chile. This resulted in the organization by the Guggenheims of the Chile Exploration Company

The emergence of multinational corporations from the United States: the period until 1914 (Chilex) in 1912 with $95 million in equity, of which $25 million was used to acquire a large porphyry copper ore deposit at Chuquicamata in northern Chile controlled by British interests. A further infusion of an additional $12 million in development funds raised through a bond issue floated in New York was necessary for the construction of a railroad, power plant and port. By 1914 development was well under way at both El Teniente and Chuquicamata—two of the largest Chilean copper properties of the Guggenheims—with the latter developed into the largest open pit mine in the world and which introduced a new copper concentration process utilizing sulfuric acid and electrolytic precipitation. In that year, American investment in Chilean copper stood at $169 million (practically all of it in these two Guggenheim companies) (Wilkins, 1970; O’Brien, 1989). 21 It was perhaps only the Guggenheims that looked to copper markets in both the United States and Europe. No American extractive enterprise envisaged the host country or region as its primary market (Wilkins, 1970). 22 For example, the Guggenheim brothers obtained a Mexican government concession in October 1890 to build smelters, the first one of which was for lead solely and a second one for copper and lead. Similarly, Robert S.Towne, of the Consolidated Kansas City Smelting and Refining Company, built a smelter in the 1890s. For a time the largest American company involved in Mexican mining and smelting was the American Smelting and Refining Company (ASARCO), a trust formed in 1899 by all the major lead and silver smelters in the United States with a capitalization of $65 million. The firm acquired Towne’s Consolidated Kansas City Smelting and Refining Company and in April 1901 the Mexican smelters of the Guggenheims. In turn, the acquisition of control of ASARCO by the Guggenheim brothers in that year enabled them to become the largest American investors in Mexico with 64 or so mining properties owned or operated by them (Wilkins, 1970; O’Brien, 1989). 23 The investment in Mexico’s first steel plant by the New Yorker Eugene Kelly was exceptional. In a rare joint venture with the Mexicans, he organized in May 1900 the Compañia Fundidora de Fierro y Acero de Monterey with a capital of $10 million (Wilkins, 1970). 24 The final abandonment of unequal treaties between Japan and the United States gave Japan the opportunity to introduce tariff protection and forced American businessmen to either invest in Japanese manufacturing or lose the Japanese market (Wilkins, 1970). 25 These publications predate that of J.J.Servan-Schreiber (1967), The American Challenge, London: Hamish Hamilton. 26 The first branch manufactory located across the border from the United States in Canada was not started until 1870 (Wilkins, 1970). 27 In 1866 the first transatlantic cable was completed and other cables followed in the period between 1865 and 1892, making possible speedy communication in different parts of the world. By the 1880s, passenger-carrying steamships made the trip from United States to Europe in five to six days, compared to the steamships in the 1850s which took nine to ten days (Wilkins, 1970). 28 A separate entity organized in a foreign country was useful for discussions with

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European competitors to control production and prices—discussions from which the American company was barred (Wilkins, 1970). 29 By 1881, as Singer’s three Glasgow factories became congested and inadequate the company decided to erect in Kilbowie, near Glasgow, a modern plant equipped with the latest American machine tools and with a capacity equal to the company’s largest American factory. The company soon realized that it could meet the demands of Europe and many other markets more cheaply by producing in Scotland than in the United States. In 1883, Canadian customs duties led to the establishment of a small manufacturing plant in Montreal to supply the Dominion market. A similar reason compelled the manufacture of stands in Austria in the same year. The Russian factory was established in 1901, and employed over 3,000 workers by 1914. The operations in Canada and Austria were small compared to those in Kilbowie and in Russia. However, Singer’s sales in Russia alone accounted for over 30 per cent of its total worldwide sales in 1913 (Carstensen, 1984). 30 This includes the exploration, production, refining and distribution of petroleum. In the period until 1914, the bulk of this was in distribution (see Table 2.1). 31 In the years from 1862 to 1865, between 28 and 59 per cent of domestically refined oil was exported. This increased to 69 per cent in 1866, and never dropped below 64 per cent in the years to 1885. In fact, it soared as high as 77 per cent in 1871 (Wilkins, 1970). 32 The expansion of the company in the Far East proved problematic with the obstacles posed by Royal Dutch Shell (which prevented Standard Oil from buying into its shares in 1898), the Dutch government (which prevented concessions in the Dutch East Indies in 1899), the British (which prevented exploration in Burma in 1902) and large expenses (investments in Japan) (Wilkins, 1970). 33 This was especially true of Jersey Standard and New York Standard. The former enlarged its foreign marketing, refining and producing facilities because it feared antitrust action with sustained domestic expansion. Its foreign deliveries exceeded its domestic deliveries of refined products. A majority of its foreign business consisted of exports of American refined products sold through wholly owned or affiliated sales companies or branches, but between 1912 and 1914 the output of its foreign refineries rose rapidly. Through its Dutch marketing affiliate, Jersey Standard was able to make its first investment in oil concessions in the Dutch East Indies in 1912. In 1913 the firm engaged in oil production in Peru. New York Standard expanded its sales network throughout the Orient and sought to acquire oilproducing properties in Palestine, Syria and Asian Minor. At the time of the dissolution of Standard Oil in 1911, the separate companies were not competitive with one another; each under the old structure had its specific region, function or products which it retained. Standard of California, which would become one of the major international oil companies, had no foreign business in 1911 (Wilkins, 1970). 34 In 1904 the company drilled a well that flowed for nine years and which yielded about 3.5 million barrels of heavy fuel oil. This was in the so-called ‘Golden Lane’—a strip of land about one mile long and 25 miles wide on the Gulf of Mexico—which became the principal source of Mexican oil. The company’s major

The emergence of multinational corporations from the United States: the period until 1914 bonanza, however, was discovered in September 1910 when the well, Juan Casiano no. 7, yielded 80 million barrels (Wilkins, 1970). 35 Independent of United Fruit Company (of which he was First Vice President), Minor C.Keith—a key American entrepreneur in railroads—raised revenues for the Costa Rican railways by cultivating bananas along its route in the late 1870s. In the 1880s and 1890s the entrepreneur, financed by British capital, acquired additional lands to cultivate bananas, obtaining 10,000 acres of jungle land near Bluefield, Nicaragua, 10,000 acres on the Caribbean side of Panama, 15,000 acres near Santa Marta, Colombia and some holdings in Honduras. Indeed, Keith—more than any other American entrepreneur—was responsible for the expansion of American farms throughout Central America. Before the end of the nineteenth century, Keith was also involved in cattle raising, mining and railroads (Wilkins, 1970).

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3 The evolution of multinational corporations from the United States The period since 1914 Introduction In the period until 1914—the period of emergence of American MNCs—the principal industries of American FDI were mining and processing of mineral ores, manufacturing, oil production and refining, agriculture and processing of agricultural produce, and railroads. The importance of these American business activities abroad—which flourished under conditions of war and the post-First World War recession—remained broadly unchanged until 1929. Hence, the period since 1914 is associated with the growth and evolution of American MNCs (Wilkins, 1974). Despite the stability in the industrial structure of American FDI in the period until 1929, there were significant shifts in the relative importance of the major host countries and in the position of the United States from a debtor nation in 1914 (receiving more portfolio and FDI from abroad compared to American portfolio and FDI in foreign countries) to a creditor nation in 1919 on account largely of the growth of American FDI abroad. Such growth enabled American MNCs to pose increasingly a challenge to European hegemony, although European investors still controlled essential raw materials such as rubber, tin and nitrates at the end of the First World War. The American challenge was particularly felt in Canada and Latin America where the gap was narrowing between American and European interests. With the breakdown of European monopolies by 1929, the American business challenge to European investors was profound in the western hemisphere where American FDI ranked supreme and in the United Kingdom. The analysis of the evolving industrial patterns of American MNCs shows the dominant role of the pioneering investments abroad by American merchants in the late seventeenth and especially the eighteenth century, railroads and mining in the late nineteenth century (which accounted for 23 per cent and 21 per cent of the stock of American FDI abroad, respectively), mining in 1908 (which accounted for 27 per cent), manufacturing in 1929 (which accounted for 24 per cent) and services in 1989 (which accounted for 47 per cent). This chapter on the evolution of American MNCs analyses these dynamic changes in the industrial patterns and their impact on the geographical destination of American FDI in the periods from 1914 to 1929, from 1929 to the Second World War, and since the

The evolution of multinational corporations from the United States: the period since 1914 Second World War.

The expansion of American MNCs from 1914 to 1929 The industrial pattern of American FDI As mentioned, there had been relative stability in the principal industries of American FDI from around 1908 to around 1929. Mining and processing of mineral ores, manufacturing, oil production and refining, and agriculture and processing of agricultural produce continued to be the predominant activities abroad of American MNCs. However, there were important changes in the pattern of American MNC activities within these industries between 1914 and 1929. The following sections examine some of those important changes. The mining and agriculture industries The previous chapter showed that early American FDI in agriculture prior to 1914 was determined largely by profitable investment opportunities abroad. The presence of abundant and relatively cheap natural resources in foreign countries in the western hemisphere enticed the emergence of American FDI in this industry. Evidence for this lies in the fact that much of the early American FDI in the industry was made by American commodity traders such as David Beekman and the Boston Fruit Company that integrated backwardly from trading into agriculture production, particularly of bananas and sugar. As mentioned, only the rare agricultural stakes in the region prior to 1914 were by American industrial companies integrating backward into agriculture production (Wilkins, 1970). Investments in foreign agriculture by American MNCs after 1914 was determined by the need to overcome anticipated potential shortages of raw materials in the United States or to gain access to raw materials that were absent completely in the United States (such as rubber, nickel and nitrates), in addition to the exploitation of profitable investment opportunities in host countries. The size of American FDI in agriculture as well as mining grew both through the expansion of existing industries and the emergence of new ones. The demands of the First World War provided greater emphasis to the importance of certain agricultural and mining investments to procure nitrates, copper, iron ore, aluminium, nickel, sugar and meat.1 The direct involvement of the United States in the war between 1917 and 1918 increased the country’s requirements for all these commodities as well as rubber, tin, tungsten and petroleum and led to the further expansion of American FDI in these industries. The need to overcome the total reliance upon London for the purchase of crude rubber and tin forced some American companies to make direct purchases or to extract/cultivate these commodities in foreign countries to fulfil the needs of American domestic enterprises. American firms purchased crude tin directly from Bolivia for smelting and refining in the United States.2 On the other hand, the three major American rubber tyre companies—U.S. Rubber Company, Goodyear and

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Firestone—engaged in backward vertical integration into rubber production or acquired rubber abroad directly to protect their rubber supplies. Their foreign investments were directed strategically to the countries of the Far East that were important sources of supply to the British and Dutch.3 The growth of American FDI in rubber in the inter-war period was, therefore, different in terms of its determinants and host countries from that in the pre-1914 period when American enterprises speculated in rubber in Mexico and Brazil. The civil strife in Mexico between 1911 and 1914 and the adverse investment climate in that country after 1914 combined with the unsatisfactory experience of the U.S. Rubber Company with respect to their investments in Brazil discouraged the further expansion of American FDI in rubber in these countries. Other American firms enlarged their foreign stakes seeking fruit (primarily bananas), tobacco, sugar, timber, hemp and other agricultural and forestry products in their quest to become more independent of foreign producers as well as to make greater profits. At the end of the First World War and through much of the 1920s, American investors engaged in agriculture and mining abroad extended their wartime investments as commodity prices remained high. Apart from the increasing complexity in the determinants and the greater number of host countries of American FDI in agriculture and mining from 1914 to 1929, the investments were also different in another respect. Unlike in the early history of the emergence of American FDI in the primary sector when the investments represented the vertical integration by American commodity traders and the horizontal integration abroad of American mining and agricultural companies, much of the expansion of American FDI in the sector since 1914 was in the form of vertical integration of industrial companies in agriculture production or mineral extraction. While Cuba and other West Indies, Central America and Canada were the major host countries for American stakes in foreign agriculture until 1914, the same set of host regions with the exception of Canada continued to be important for American FDI in agriculture until 1929. The importance of the Caribbean region as a location became more emphasized with a share of almost 80 per cent of American FDI worldwide in this industry in 1929, particularly in light of the expansion of investments by fruit growers and buyers throughout Central America, the Caribbean Islands and Colombia. The largest among these continued to be the United Fruit Company whose major expansion from the Caribbean to the Pacific coast of Central America in the 1920s enabled the company to be much larger in comparison to its host countries (Wilkins, 1974). The declined importance of Canada as a host country for American FDI in agriculture has stemmed largely from the forward integration of American firms from the extraction of timber to the processing of paper and pulp in that country, as previously mentioned. The relative importance of Mexico as a host country for American FDI in this sector also declined with the nationalization of American landholdings in the 1920s. On the other hand, Asia and the Far East and, to a lesser extent, Africa (Liberia particularly) grew in importance with the expansion of American tyre companies in the extraction of rubber in the region. American FDI in mining ore processing continued to be directed to South America, Mexico and Canada from 1914 to 1929, although the relative importance of Mexico—the site of large-scale American investments in mining in the period until 1914—declined

The evolution of multinational corporations from the United States: the period since 1914 since owing to the unstable political situation in that country. Thus, only 14 of the 110 American mining companies with properties in Mexico were able to continue in operation from 1914 to 1919 (Wilkins, 1974). Meanwhile, American mining interests in Chile grew dramatically, accounting for 87 per cent of Chile’s copper output by 1918 (O’Brien, 1989). Indeed, Chile became the single most important host country of American FDI in mining in the 1920s. The foreign mining activities of American firms by the 1920s included asbestos, bauxite, chrome, coal, copper, diamonds, iron ore, lead, manganese, nickel, nitrates, platinum, potash, tin, tungsten, vanadium, and zinc, as well as gold and silver. Investors such as the Guggenheims (directly and through their control of the American Smelting and Refining Company and Kennecott), American Metal Company, Anaconda, and Newmont Mining were important MNCs in the 1920s, all of which with the exception of Kennecott were increasingly becoming more multinational in their operations through their mining or exploration of ores in three or more foreign countries. During the 1920s, the growth of American mining in Latin America was greatest in nitrates and copper in Chile, copper, lead and zinc in Peru, and tin in Bolivia. In addition, American businesses invested in iron ore (Chile and Brazil), manganese (Chile and Brazil), vanadium (Peru), tungsten (Bolivia), gold (Colombia and Ecuador), platinum (Colombia) and bauxite (Dutch Guiana and British Guiana). By 1929, the bulk of the productive mineral resources of South America was owned by American interests (Bain and Read, 1934). The manufacturing sector The previous chapter showed that the manufacturing sector has always been an important sector of American FDI, accounting for some 15 per cent of the stock of American FDI abroad in 1897, and some 18 per cent in both 1908 and 1914 (see Table 2.1). Thus, while representing the third-largest sector of American FDI in 1897, the sector became the second single largest sector of American FDI from 1908 to 1928. In 1929, the manufacturing sector became the most important sector of American FDI. The rapid importance of market-oriented FDI by American MNCs since 1914 was associated with relatively new industries. Hence, the previous importance of metallurgical firms in American FDI in manufacturing gave way in the 1920s to the expansion of industries and firms with trademarked or branded merchandise advertised widely in the United States (such as food and drink, textiles and clothing), as well as firms with distinctive products. American industries with worldwide technological leadership gained abroad from the transfer of techniques in product design and engineering and organization of production (electrical industry, motor vehicle industry, certain metal products, petroleum), as have companies using advanced marketing methods (motor vehicle industry, metal products, petroleum). As in the period before 1914, large companies—typically exporting companies in such industries as electrical equipment, telephone and telegraph, motor vehicles and petroleum—led the expansion of American manufacturing activities abroad in the 1920s, with the exception of suppliers to the motor vehicle industry that followed their American customers, the motor vehicle companies, in their investment forays overseas. More typically, the reason for market-

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oriented FDI lay in the business opportunities to be met in the host country and in the fact that the best way to meet those business opportunities was through outward FDI. As in the past, the largest market-oriented stakes in the 1920s tended to be directed to the most affluent nations of the world, those with industrialized and technologically advanced economies and where the markets were largest—Canada and Europe. The predominance of Canada as a host country for American FDI in manufacturing and its relative importance remained largely unchanged from 1897 to 1929. As in the mining and agriculture industries, the period from 1914 to 1929 was associated with the growth of already existing American factories as well as the emergence of new manufacturing industries in Canadian manufacturing. For example, the emergence of the American abrasives industry in Canada from 1914 to 1916 was prompted by the disruption in 1914 of American imports from Europe of aluminium oxide, emery and corundum—essential raw materials for grinding wheels and abrasives. War-associated factors also prompted the emergence and expansion of FDI in Canada by American companies in the explosives, chemicals and petroleum refining industries, including that of Procter & Gamble whose first foreign plant—a $1 million Canadian plant completed in 1915—was made to counter the virtual domination of the Lever Company of the Canadian economy at a time when the British were preoccupied with the war. Participation in the Dominion war effort also led to two new entries by American firms in the Canadian car industry—that of Chalmers Motor Corp (predecessor of Chrysler) and Willys-Overland—and the expansion of the Ford Motor Company. The inflation in the United States brought on by the war boom also led to the further expansion of American investments in Canadian pulp and paper mills to service the needs of American domestic enterprises that were major users of paper. Four new, large American pulp and paper mills were constructed across the northern border in Canada from 1914 to 1916, attracted by the presence of an abundant supply of inexpensive timber and hydroelectric power, relatively cheap labour and the absence of American duties on Canadian newsprint since 1911. American manufacturing firms continued to expand until the end of that decade, opening more than 200 branch factories in 1919 alone and a large number in 1920 (Wilkins, 1974). With the search for markets becoming an important facet of the American expansion abroad in the 1920s, there was a sharp rise in the market-oriented endeavours of American MNCs in Canada in that decade. As in times past, the imposition of tariff barriers to trade and the maintenance of a liberal policy on the movements of labour, capital and technology enabled Canada to encourage the growth of American FDI and secure further the position of American business in the Canadian economy. American stakes in Canada in both manufacturing and utilities became overwhelmingly local market oriented. The position of Europe as the second-largest host region for American FDI in manufacturing remained stable from 1897 to 1929. While some American manufacturing businesses in Europe ceased functioning during the First World War, and in particular in the period between the summer of 1914 and the spring of 1917, many affiliates of American metallurgical companies in Europe were redirected to war production to fulfil the host nation’s or occupying power’s needs.4 The affiliates were used either as

The evolution of multinational corporations from the United States: the period since 1914 temporary barracks, or were made to produce airplane parts, shells, munitions and other weapons for the military on both sides of the conflict. The operations of the production subsidiaries on both sides of the conflict during the First World War proved to be profitable. Although the American parent companies retained direct contact with their European subsidiaries and affiliates on both sides of the divide during this period, the various European units usually had no contacts with one another (Wilkins, 1974). The involvement of the United States in the war between 6 April 1917 and 11 November 1918 had dramatic implications for American business in the territory of the Central Powers. Some 159 American businesses and properties in Germany had been sequestrated by 21 October 1918, and although many of these were not substantial, often comprising a sales branch, a warehouse and a small inventory, a few were large investments such as the German plants of the American Radiator Company, Steinway & Sons and Singer (Wilkins, 1974). On the other hand, American enterprises in the Allied and most neutral nations, including Latin America, Japan and China flourished during this period to meet wartime demands. American manufacturers took steps in the 1920s both to regain control over their European operations and to initiate new investments in England and in the continent in response to both opportunities for expansion of investments and threats to exports. The promise of European economic growth in the mid-1920s as normality returned to much of Europe (excluding the Soviet Union) was followed toward that decade’s end by growing nationalism and rising tariffs in Germany, France, Italy, Spain, Austria and England. Thus, much of the European stakes by American firms by 1929 reflected the need of American companies to overcome tariffs and to operate plants close to their customers. By comparison to Canada and Europe, South America was a far less important site for American FDI in manufacturing with a share of between 6 and 9 per cent of American FDI in this sector worldwide in 1919 and 1929. Nevertheless, the region became an important site for major new stakes in manufacturing by American companies since 1914. Unlike in Canada and Europe, American FDI in the manufacturing sector of South America between 1914 and 1917 was less influenced by the war, and became the basis for the further expansion of American businesses in the region particularly in the motor vehicles industry and supplier industries such as rubber tyres. For example, the Ford Motor Company that established a sales branch in Argentina in 1914 also established in that country the first car assembly plant in Latin America in 1916. Studebaker similarly established a sales room, a repair shop, a stock room and an assembly plant in Argentina in 1915. Associated with these investments by American car companies in Argentina were those of the Goodyear Tire and Rubber Company and the U.S. Rubber Company that opened sales branches in Argentina in 1915 and 1916, respectively (Wilkins, 1974). Apart from Latin America (primarily Argentina), many of the same large American industrial enterprises that sold and then manufactured (or refined oil) in Europe and Canada during the 1920s also invested in Asia, Oceania (primarily Australia) and Africa, but made far smaller capital commitments to search for markets. In these continents, neither opportunities for sale nor threats to exports attracted large investments by American companies seeking foreign markets. Instead, in many instances, Americans

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established sales outlets and built service, assembly, packaging and mixing plants rather than full-fledged manufactories.5 There were no market-oriented oil refineries owned by American companies in all of Asia, Oceania and Africa in the 1920s. The petroleum industry By comparison to the period before the First World War when marketing was the predominant motive behind American stakes in petroleum abroad, the period since described the increasing motivations of American petroleum companies to expand abroad in light of both marketing and supply considerations. As had been the case with companies in the agricultural, mineral and manufacturing sectors, the international expansion of petroleum companies in the immediate period after 1914 was influenced initially by the demands of the war in Europe and by rising petroleum prices. This was particularly the case during the direct involvement of the United States in the First World War between 1917 and 1918, but even at the end of that war fears of an oil shortage in the United States influenced the expansion abroad of American petroleum companies in search of foreign oil. Thus, foreign investments in petroleum in the period since 1914 was geared increasingly to supply the petroleum requirements of the United States as well as the established marketing outlets of American petroleum companies worldwide. These reasons propelled the expansion of American petroleum companies in Mexico and South America—a country and region that had always been important sites for petroleum exploration by American companies since the 1890s with the pioneering investments of Jersey Standard. Although Mexico persisted as the single most dominant host country for American companies in foreign oil production with a share of one-third of American FDI in petroleum worldwide in 1919, a number of investment obstacles in Mexico in the early 1920s—involving the imposition of government decrees on oil nationalization and new Mexican export taxes on petroleum combined with substantial capital expenditures in exploration—encouraged American oil enterprises at the start of the 1920s to seek foreign crude oil in every continent (Wilkins, 1974).6 As a result, American corporations sought oil in Central America, Colombia, Peru, Argentina, Brazil, Ecuador, Bolivia, Canada, in the vast Soviet oil resources in Europe, the Far East and the Middle East, although American stakes in oil production remained most significant in Mexico and Venezuela by 1929. Indeed, American petroleum companies became involved in oil production in each of the ten largest oil producing countries by 1929, with the exception of the USSR and Iran.7 As the assumed petroleum shortage abated in the late 1920s, the enthusiasm for foreign oil development subsided by the end of that decade. At that time, negotiations with governments of host countries began to characterize the entry and expansion of American petroleum companies in many foreign countries.8 Despite these investment obstacles and the declining prices of crude rubber, sugar, nitrates, manganese and oil in 1929, American supply-oriented ventures in these industries continued to rise in number and scale in order to diversify and control the sources of supply.

The evolution of multinational corporations from the United States: the period since 1914

The geographical destination of American FDI Despite the relative stability in the importance of mining, manufacturing, petroleum and agricultural sectors in American FDI from 1897 to 1929, there were significant shifts in the relative importance of host countries. The problems with Mexico as mentioned above led to the slow growth of American FDI in that country. Thus, from being the most important host country of American FDI in the period until the start of the Mexican Civil War in 1911 and the second-largest host country in 1914 after Canada, Mexico had become only the fifth-largest host country for American FDI in 1919. As a result, the former major host regions ascended in importance in the same order with Europe becoming the second-largest host region after Canada, followed by the Caribbean and South America. The growth of new American FDI between 1914 and 1917 outside Mexico, Russia and Continental Europe flourished with the opportunities and the temporary cessation of European competition owing to the war. The majority of American FDI in these regions continued to expand even after the end of the First World War. With the breakdown of European monopolies by 1929, South America became the largest host country for American FDI, followed by Canada, Europe, the Caribbean and Mexico. The ascendance of South America was largely owing to the expansion in the region of American FDI in petroleum and utilities primarily, and also mining and manufacturing.

The growth of American FDI from 1929 to the Second World War As noted in the introduction to this chapter, the period around 1929 marked a structural change in the industrial pattern of American FDI. It was the period in which manufacturing became the most important sector of American FDI, accounting for 24 per cent of the stock of American FDI. The other four most important industries in 1929 were petroleum (18 per cent), mining (16 per cent), utilities (14 per cent) and agriculture (13 per cent).9 Railroads, which was the most important sector of American FDI in 1897, became only the fifth important sector in 1908 and declined further to seventh place by the end of the 1920s. The importance of these industries remained stable until around the end of the Second World War when another structural change in the industrial pattern of American FDI became evident, although less dramatic than that observed in 1929. Some of the salient determinants of American FDI between 1929 and the Second World War are discussed below. The expansion of American businesses abroad between 1929 and the end of the Second World War was influenced by a number of factors. While the depression of the late 1920s and the stock market crash of 1929 either curtailed or caused many American enterprises to retreat from business abroad, some manufacturing companies felt compelled to initiate international production that would not have been made otherwise had there been no actions by host country governments to achieve nationalism, autarky and

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industrialization. This included trade restraints of various forms (tariffs, exchange controls, quotas and sometimes embargoes), as well as policies specifically directed to affect inward FDI either in terms of conditions of entry or operating requirements.10 This was the case in the United Kingdom and throughout the European continent, Canada and Australia where higher tariffs were imposed in the early 1930s, as well as in Japan where trade restrictions were imposed and emphasis was placed on rapid domestic industrialization by the Japanese government. Indeed, host country government regulations increasingly became the sine qua non of international production by American firms (Wilkins, 1974). However, the surge in the establishment of American-owned factories abroad in this period proved temporary as many ventures failed owing to the depressed economic conditions. American firms in agriculture and mining also reduced their FDI in the 1930s as prices of both mineral and agricultural products correlated directly with the fluctuations in the business cycle. The decade of the 1930s represented the beginning of retrenchment and retreat of American FDI (Wilkins, 1974), a trend that was to continue until the end of the Second World War. To the extent that international production took place, this was determined on the basis of negotiations with governments in each host country and by international agreements concluded by American companies. The unfavourable investment climate in the various host countries in the 1930s also affected the international expansion of American petroleum companies.11 Nevertheless, the sustained growth of American FDI in this sector was driven by an increasing demand for petroleum as an energy source for modern industry, the need to diversify risks, the availability of capital, the potential for profit and, above all, the need to overcome or stay ahead of competing investments by other oil companies, whether American or foreign. Several features describe the evolution of American FDI in the petroleum industry in the 1930s. First, there was the reorganization of trade and FDI by American firms as a result of the oil glut, the possibility of sourcing cheap crude oil from Venezuela, the low price of petroleum associated with the economic depression, and the imposition of American tariffs on the entry of foreign oil in 1932. This meant that supplies of refined oil previously exported from the United States to the marketing and distribution outlets of American petroleum companies in Europe were replaced increasingly by cheaper supplies of oil exported from Venezuela.12 Venezuela remained the predominant source of petroleum in Europe until 1948, when crude oil from the Middle East began to displace oil from Venezuela in importance. Second, the form of international expansion by American petroleum companies in the 1930s was favoured, in some cases, by joint ventures concluded mainly with other western oil companies in light of the prevailing economic depression, the increased political and commercial risks and the high capital requirements for investment.13 Foreign oil companies in Europe have been expected to participate in national cartel arrangements by many nationalist European governments. By 1939, American oil companies had invested in 58 refineries abroad, of which 39 were in consumer countries outside of Africa, Asia and Oceania (with the exception of Japan) that imported crude oil, and 19 were in or near oil-producing countries.14 Ten American oil companies represented well over 90 per cent of American petroleum investments abroad, of which five stood out as large integrated MNCs: Jersey Standard,

The evolution of multinational corporations from the United States: the period since 1914 Socony-Vacuum, Gulf, Standard of California and Texaco. Those five American petroleum companies together with the British-owned Anglo-Iranian Oil Company and the British and Dutch-owned Royal Dutch Shell comprised the seven largest oil companies in the world at the end of the 1930s (Wilkins, 1974).15 The Second World War exerted a variable impact on the expansion of American MNCs. American businesses abroad encountered new interventions by host country governments or occupying power, as well as increasing government interventions both in the United States and in foreign countries. On the one hand, there was the expansion of American businesses in Canada and Europe where subsidiaries and affiliates of American companies served to fulfil the military and defence requirements of the Allied countries—a theme resonant of the events around the First World War.16 This made the position of American MNCs in the western hemisphere to grow significantly in relation to European MNCs. On the other hand, there was the fragmentation of American businesses in the Axis countries as well as in the occupied countries of Asia and Europe where American plants that had not been sold or destroyed by bombings were geared to serve the Axis war effort. At the same time, the restrictive international agreements concluded by some American MNCs abroad regarded to have an effect on the foreign commerce of the United States came under increased scrutiny by the United States government as a violation of the Sherman Antitrust Act. All these factors meant that the level of American FDI in the immediate aftermath of the Second World War—at $7.2 billion in 1946—remained below its 1929 level of $7.6 billion.

The dominance of American MNCs since the Second World War Explaining the expansion of American FDI since the Second World War: the role of financial factors Despite the political, economic and military uncertainties abroad in the immediate aftermath of the Second World War, the United States government sought to promote the expansion of all American private investment abroad in ‘politically friendly’ countries starting in Europe and in less developed countries in the 1950s and 1960s.17 The promotion of American private capital abroad served both economic and political objectives: first, it was an important means to recycle the balance-of-payments surplus of the United States in the immediate period after the Second World War; and second, it was an important means to implement American foreign policy to contain communism and to promote democracy in host countries by its impact on economic growth. The prevailing ideology was that economic growth fostered by the export of capital, technology, skills and management by American MNCs was the foundation of a democratic world. Even as the balance-of-payments position of the United States turned from a surplus to a deficit in the 1950s and more so in the 1960s, American stakes abroad nevertheless continued to rise as indicated by the near tripling of the outward stock of American FDI between 1950 and 1960 from $11.8 billion to $31.9 billion, with the growth particularly high in developed countries.18 One explanation for this is a financial one, and stems from

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the United States dollar remaining a strong currency not only on account of the overall balance-of-payments surplus of the United States in the early post-war period, but also on account of the unique role of the dollar as a key currency and a medium of international monetary reserve in the Bretton Woods adjustable-peg system of exchange rates that prevailed from 1944 until 1971. Under this system of exchange rates the dollar came to be overvalued substantially in relation to the currencies of its major trading partners as its fixed exchange rate overstated the worth of the dollar when compared to its market or equilibrium rate. The obligations of the United States to keep the dollar convertible to gold at $35 per ounce meant that it could not devalue the dollar in terms of gold without undermining confidence in the existing system of exchange rates. The overvaluation of the dollar made foreign currencies and, by extension, foreign assets, goods and services cheap in terms of the dollar and contributed to yet higher levels of outward FDI by American firms (Aliber, 1970). Indeed, the growth of American FDI was so rapid that by 1960 the stock of American FDI at $31.9 billion not only exceeded the stock of FDI abroad of the United Kingdom—the largest source country of FDI until then—whose value reached $12.4 billion in 1960, but also the total private investment overseas of the United Kingdom at $26.4 billion (Wilkins, 1974). This enabled the United States to become the largest home country of FDI since the Second World War, a position it has maintained consistently for more than half a century to the present time. In response to the growing balance-of-payments deficits in the 1960s, mandatory controls on the outflow of American FDI as well as controls on the reinvestment of profits of American businesses earned abroad was imposed for the first time on 1 January 1968.19 The aim was not to limit American FDI as such, but to limit its negative balanceof-payments effect (Wilkins, 1974). This had important implications on the financing of American FDI during this period. The growth of foreign stakes in market-seeking manufacturing activities associated with the growth of foreign demand was financed almost entirely from reinvested earnings of established foreign subsidiaries and affiliates.20 Borrowing abroad also became a popular mode to finance FDI not only to relieve the balance-of-payments deficit, but also as a hedge against devaluation of currencies, a safeguard against blocked payments and, often, as a convenience.21 The industrial pattern of American FDI since the Second World War The United States emerged from the Second World War as the leading industrial nation and American firms persisted as the dominant source of new innovations and thus had a decisive lead in the production of a whole range of technologically intensive producer goods and high-income consumer goods until around the late 1960s and 1970s with the decline of Pax Americana (Dunning, 1985). Manufacturing thus remained the most important sector of American FDI for sixty years from 1929 through to 1989, although there were other more subtle changes in the industrial pattern of American FDI that defined the era since the Second World War. The most important industries of American FDI in 1950 were manufacturing which accounted for one-third of the stock of American FDI, petroleum (with a share of 29 per cent), public utilities (12 per cent), mining (10 per cent), and trade (6 per cent). Thus,

The evolution of multinational corporations from the United States: the period since 1914 wholesale and retail trade was defined as a significant sector of American FDI in 1950 associated with the expansion abroad of American mass merchandisers, while American FDI in public utilities and especially agriculture began to become less important. Consequently, although the expansion of American MNCs in public utilities (in particular those in communications and power and light) starting in the 1920s was favoured initially by the strong support of the United States government and the ownership advantages of American firms in the form of capital, technology, management and marketing expertise, their rate of growth slowed down after 1950.22 American public utility companies in Latin America, for example, sold their assets owing to low profits and national pressures in host countries (Wilkins, 1974). More significantly, American FDI in agriculture which featured consistently among the five most important industries of American FDI, at least until 1929, declined considerably in importance and never since regained influence as a major industry of American FDI (US Department of Commerce, Office of Business Economics, 1960). This owed much to the depression of the late 1920s and early 1930s which made investments in raw materials a liability as prices of agricultural produce plummeted and agricultural companies recorded losses. The nationalization and expropriation in Latin America from 1933 to 1939 served to exacerbate the adverse investment conditions for American investors holding foreign agricultural properties. By 1950, FDI in agriculture amounted to only $589 million, of which 60 per cent was in sugar production in Cuba and the West Indies mainly, and another 26 per cent was in fruit (principally in bananas) in Central America (US Department of Commerce, Office of Business Economics, 1950). The bulk of American FDI in manufacturing since the Second World War continued to be directed to western Europe and Canada. The end of the Second World War and the economic recovery in Europe was considered a watershed in the history of American manufacturing in that region (Wilkins, 1974).23 Indeed, manufacturing became the most important sector of American FDI in Europe by size of investment starting from the 1950s and exceeded the level of American FDI in the same sector in Canada by 1964. This represented a notable change from the previously prevailing pattern when Canada was a more important host country for American manufacturing FDI by comparison to Europe which was a more important host country for American FDI in sales. The kinds of American manufacturing enterprises that invested in plants abroad in the late 1950s and 1960s resembled closely the investors of earlier years: these were leading firms in their industries in the United States that had advantages in technology, unique products, and a long history of international economic orientation. The fact that an industry was technologically advanced did not ipso facto guarantee large FDI, but it generally meant that leading companies in that industry would, in time, and after finding exports could not continue to fill foreign demand, show an interest in extending their business through investments abroad (Wilkins, 1974).24 This was the era of American FDI which inspired the development of the product cycle model of Vernon (1966). In the product cycle model, a technologically innovative firm would serve a growing foreign demand for a maturing product through exports initially, and may switch to international production at a later stage when threats to the export business emerge. Similarly, the rank of a firm in American industry was in itself an inadequate explanation of the growth of

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FDI of American companies in manufacturing in the late 1950s and 1960s.25 At least two of these attributes seem to have been a prerequisite for large-scale American FDI (Wilkins, 1974). Most formal analyses of the determinants of the outward FDI intensity or the propensity of the United States to invest abroad find statistically significant positive roles for R&D intensity and advertising intensity, reflecting the importance of technology and marketing capabilities as key elements of firm-specific intangible assets of American MNCs (see among others, Caves, 1982).26 Other determinants of outward FDI intensity found to be also important were managerial capabilities and capital cost advantages (Pugel, 1981). Similar findings were concluded by Clegg (1987) who showed that the degree of innovation and the creation of technological ownership advantages as well as capital intensity had highly significant positive influences on American FDI in manufacturing, while the skill level of production workers had a significant negative effect. A related study of the industry-specific determinants of the export competitiveness of American MNCs showed the statistically significant positive roles of R&D intensity and human capital intensity and a statistically significant negative role of labour intensity—an indication of the importance of both research and skilled labour, but not unskilled labour, as driving forces behind the high shares of American MNCs in world exports of manufactures. High advertising intensity, although contributing to the export competitiveness of American MNCs as a whole, fulfilled a relatively more important role in boosting the export competitiveness of foreign affiliates than of their parent companies (Kravis and Lipsey, 1992).27 The most important manufacturing industries of American FDI during most of the 1960s when measured in terms of the size of sales of American foreign manufacturing affiliates were in declining order: transportation equipment (primarily motor vehicles and equipment), chemicals, machinery (excluding electrical), food products, electrical machinery, and primary and fabricated metals. Thus, those firms in the vanguard of technology in the late 1950s and 1960s were both in the same (albeit transformed) industries of past decades as well as in new manufacturing industries which emerged rapidly in importance since the Second World War. The acquisition of undisputed world leadership in technology by American chemical companies as well as the severance of restrictive ties between these companies and their British and German counterparts owing to antitrust action and wartime conflict enabled American MNCs in the chemical industry to come into their own after the Second World War. Similarly, the large investments in international production by American car manufacturers in the late 1950s and 1960s reflected not only the strengths of the leading firms in this industry, but also the prominent position of the car industry in all of American industry.28 Their significant presence in foreign markets made the sales of foreign manufacturing affiliates of American firms in this industry exceed that of all other foreign manufacturing affiliates of American firms in the 1960s (Wilkins, 1974). Transportation equipment, chemicals and allied products, machinery (excluding electrical), food and related products and electrical and electronic equipment remained the five most important manufacturing industries of American FDI through the 1980s and 1990s, even though the relative importance of the individual industries in American FDI

The evolution of multinational corporations from the United States: the period since 1914 altered since the 1960s.29 As in decades past, the expansion of American manufacturing firms through international production enabled the firms to maintain their longestablished position in foreign countries, fulfil a growing foreign demand and meet rising foreign competition—explanations that are in line with the product cycle model. The pursuit of profits was not seen as a crucial motivation (Wilkins, 1974). Some marketoriented investments were made to defend existing markets, but many of the investments since the late 1950s and 1960s were aggressive new stakes designed to penetrate new overseas markets. To acquire and hold these markets, international production as opposed to exports from the United States seemed almost a necessity. Petroleum remained the second-largest sector of American FDI from 1929 until the mid-1960s, when its relative importance began to decline from 34 per cent of the stock of American FDI in 1960 to 26 per cent in 1970, 13 per cent in 1989, and 10 per cent in 1997.30 Despite the disadvantageous foreign investment climate, the aggressive nature of foreign investments of American oil companies in every facet of the petroleum business in the immediate years after the Second World War owed largely to the growing demand for oil as the most important single source of energy, the perceived shortage of oil resources of the United States as well as profits.31 Starting in the late 1950s and 1960s, the American oil companies exported not so much new products as improved methods associated with significant process innovations in refining, transportation, production and exploration. While the main stakes in petroleum marketing and market-related activities continued to be concentrated in developed nations where markets were largest, investments in petroleum exploration and production were concentrated in oil-rich developing countries especially in Venezuela and elsewhere in Latin America, the Middle East, north of Africa, west Africa and Indonesia. In the Middle East, in particular, American oil companies triumphed over British—Dutch oil interests starting from the early 1950s (Wilkins, 1974). Similar demands placed on America’s mineral resources by the Second World War and the frequent forecasts of domestic shortages of minerals (particularly iron ore) ensured that mining remained an important sector of American FDI in the period since the Second World War. Investments in mining iron ore to supply American steel producers were the most significant new stakes by Americans in foreign mining in the immediate postwar years, followed by uranium owing to developments in atomic energy. Over time, the mining of copper, lead, zinc, gold and silver ores accounted for the bulk of investments in the sector by American MNCs. The investments in foreign mining were made by mining, manufacturing and, occasionally, oil companies.32 A marked change in the number of host countries of American FDI in mining occurred starting in the late 1950s and 1960s owing much to the unfavourable investment environment in Latin America which led American MNCs to seek minerals in Canada and Australia. Latin America, Canada, Australia and Africa continued to be the most important host countries for mineral investments by American MNCs by 1997. Apart from the five major sectors of American FDI of manufacturing, petroleum, trade, mining and public utilities, American FDI since the late 1950s and 1960s emerged and expanded in finance, insurance and real estate, a wide range of services (business services, car rental and leasing, hotels and lodging, motion pictures, etc.),

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communication, and other services-related industries. Their emergence abroad demonstrated a cluster complex in which American companies and American travellers abroad enticed their traditional suppliers into new investment stakes. By around 1989, another structural change in the industrial pattern of American FDI became evident with the ascendance of services—with a share of 47 per cent of the stock of American FDI abroad—as the single most important economic sector for American MNCs. This is associated with the increasing service orientation of the American economy—a feature of the post-industrial status of most developed market economies. The geographical destination of American FDI since the Second World War Despite American policies in the late 1950s and 1960s to foster the growth of American FDI in less developed countries, an increasing amount of American FDI since the Second World War was directed to developed countries.33 Thus, although by 1950 the book value of American FDI stock in both developed and developing countries was roughly the same at $5.7 billion, the faster growth of American FDI in developed countries since made American FDI in developed countries reach $19.3 billion in 1960 and $51.8 billion in 1970—levels that were 1.7 times larger and 2.7 times larger than their corresponding investments in developing countries in those years, respectively. The growing importance of market-oriented FDI over supply-oriented FDI which started in the 1920s and continued in a major way since the Second World War largely explain this trend. In particular, the wealthiest nations of the world—those of western Europe and Canada—where there were high levels of income, rapid economic growth, large markets, resources and a favourable investment climate attracted American FDI. The attractiveness of Europe in general, and the large countries of the European Economic Community in particular, since the late 1950s was favoured by the emerging regional prosperity and the movements towards regional economic integration.34 Notwithstanding the persistent dollar shortage in Europe after the Second World War linked to the lag in which innovation in that region followed that in the United States (Johnson, 1958), financial factors in Europe also played a role: the convertibility of the currencies of many European countries in 1958 and the formation and development of a Eurodollar market and Eurodollar bond market facilitated borrowing and lending in dollars and helped to change the dollar shortage in Europe to one of a dollar surplus. By 1960, the level of American FDI in Europe surpassed that in Canada for the first time. The growing presence and control of American MNCs in Europe since the Second World War as forcefully argued in Vernon (1971, 1974) and Servan-Schreiber (1967) among others was reminiscent of a similar pattern of events exhibited around the turn of the century when the influx of American manufactured goods in Europe precipitated the works of McKenzie (1901), Thwaite (1902) and Stead (1902). Nevertheless, Canada remained an important host country for American FDI in the period since the Second World War. American FDI both fulfilled the needs of growing Canadian markets and helped to develop its newly discovered mineral and oil resources. By contrast, although American companies desired to expand their investments in Japan, controls on inward FDI associated with policies of indigenous technological development

The evolution of multinational corporations from the United States: the period since 1914 would not permit American corporations to play a leading role in the Japanese economy. In general, developing countries did not attract high levels of American FDI since the Second World War owing to their economic and political instabilities which made the investment climate in these countries unsatisfactory. In the developing countries of Asia, Africa and Latin America, the dramatic rise in the economic power of national governments had a profound impact on the course of American businesses in petroleum, mining, agriculture and manufacturing in the 1960s and 1970s. It became increasingly evident that the growth of American FDI in developing countries would be under terms set by the host governments. In Latin America, government measures served to stimulate the growth of American FDI in some sectors such as manufacturing and discourage new stakes in other sectors. American FDI in the developing countries of Asia and Africa increased, particularly those that took advantage of abundant labour at lower costs or did not benefit from economies of scale.35 However, with the exception of the Philippines, the size and degree of integration of American stakes in manufacturing in these countries were far smaller than in the developed countries or Latin America—host regions of long interest to American investors. This is largely due to unfamiliarity of American firms with investment in these territories, government restrictions and bureaucracy, and limited markets.36 By 1987, the book value of American FDI stock in developed countries reached $237.5 billion—a level some 3.3 times higher than American FDI in developing countries of $73 billion. By 1997, the book value of American FDI stock in developed countries further increased to $590 billion—a level some 2.2 times higher than American FDI in developing countries of $267.5 billion.37 Thus, although there seems to be some evidence to suggest that the gaps between the stock of American FDI in developed and developing countries narrowed between 1987 and 1997 owing to the greater locational advantages of these countries for FDI explained partly in the case of Mexico in the context of the North America Free Trade Agreement concluded in 1994, the developed countries remain the overwhelmingly dominant recipient of American FDI with a share of 69 per cent of the stock of American FDI in 1997.

Conclusion The period since 1914 described the period of the growth and evolution of American MNCs. The principal industries of American FDI in 1908 consisting of mining and processing of mineral ores, manufacturing, oil production and refining, agriculture and processing of agricultural produce, and railroads remained essentially stable until 1929. Thus, in essence, the primary sector was the dominant sector of American FDI until 1929 associated with the importance of supply-oriented FDI for American MNCs in resourcerich developing countries. In 1929, a significant structural change in the sectoral pattern of American FDI became evident with the ascendance of the manufacturing sector as the most important sector of American FDI associated with the growth in importance of market-oriented FDI in market-rich developed countries of Western Europe and Canada. This pattern persisted for 60 years until 1989 when another structural change in the sectoral pattern of American FDI became evident with the dominance of the services

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sector in American FDI. Thus, the dominant sectoral pattern of American FDI traversed the primary, secondary and tertiary sectors of economic activity over the course of more than a century. Such significant structural shifts in the sectoral pattern of American FDI correlated directly with shifts in the geographical pattern of American FDI. Thus, in the period before 1929 when the primary sector was the dominant sector of American FDI, the resource-rich countries of the Caribbean, South America, Mexico and Canada received the majority of American FDI. The ascendance of the manufacturing sector as the dominant sector of American FDI starting from 1929 led to an increase in the share of American FDI directed to Canada, Western Europe and other market-rich developed countries. These countries have received the majority share of the stock of American FDI abroad since the Second World War and will continue to do so in the future.

Notes 1 The destruction brought by war of American sugar-producing properties in northern France, Belgium and south-western Russia, and the end of sugar exports from Germany and Austria-Hungary led to the further expansion of American investments in Cuban cane sugar to meet the demands of the Allied powers as well as the United States. The war demands for nitrates used for explosives and fertilizers led to the acquisition in 1916 by W.R. Grace & Co.—an American company prominent in the nitrate trade in Chile—of the Tarapaca & Tocopilla Nitrate Company in Chile from its British owners for $3 million. This represented the first backward integration of the company into the ownership of nitrate refineries or oficinas. By selling their Chuquicamata copper interests in Chile, the Guggenheim brothers also acquired an interest in Chilean nitrates, developing in the process a new nitrate production system in 1923 based on refrigeration which permitted treatment in large lots and which out-performed the prevailing Shanks system in its ability to treat ores with a lower assay of 8 per cent as opposed to a minimum of 15 per cent. Similar war demands led to the further expansion of American copper, steel, nickel and aluminium companies as well as the emergence of new ones. Also, the vast meat requirements of European armies led to the expansion of the established meat packing plants of Swift, Armour, Morris and Wilson in South America, as well as the establishment of new ones in the southern part of the western hemisphere and in Australia (Wilkins, 1974; O’Brien, 1989). 2 To support the objective of obtaining tin from Bolivia, W.R. Grace & Co., which was for years established in trade and investment on the west coast of South America, organized the International Mining Company—a large producer of Bolivian tungsten and, to a lesser extent, tin (Wilkins, 1974). 3 With the continued expansion of rubber plantations in the Far East by American tyre manufacturers, the companies obtained some protection against the anticipated higher price of rubber as a result of the Stevenson Rubber Scheme advanced by Great Britain in 1922 to assist British planters in Ceylon and Malaya by restricting

The evolution of multinational corporations from the United States: the period since 1914 output and raising prices. Firestone also sought to develop rubber plantations in Liberia, tied to a private loan to that country and the improvement of the Liberian harbour to aid rubber exports. This direct investment was exceptional in the involvement of the American government in the loan arrangements. Henry Ford also resolved to grow his own rubber and made substantial investments in planting rubber trees in Brazil in 1927–1928. However, these companies that integrated backward into rubber cultivation were not protected against the fall in rubber prices that occurred in 1929 (Wilkins, 1974). 4 Nowhere was this more evident than in the operations of the various European affiliates of the American Radiator Company. Its factory in Dôle was requisitioned by the French state to provide temporary barracks and to produce shells for their nation’s military needs. The Italian unit of the company pledged to sell semicast steel shells to the Italian government, while their two German plants made cast iron shells for the imperial regime. The plant in Austria manufactured munitions, while that in England—the National Radiator Company Ltd—agreed to supply the Belgians with hand grenades and concluded other contracts with British authorities. The British government took over the large sewing machine plant of Singer in Scotland, where sewing machine production ceased and the plant manufactured airplane parts and munitions instead (Wilkins, 1974). 5 For example, there existed a variety of small American stakes in miscellaneous manufacturing for export such as carpets, hand-woven tapestries and textile mills in China, embroidery in the Philippines, carpet manufacture in Turkey, and jute in India. The various foreign interests of American firms in textiles were exceptional in their motive to gain access to cheap labour abroad with a high degree of skill and dexterity. Most of the investments were made by small American businesses resident abroad, rather than by MNCs (Wilkins, 1974). 6 American petroleum companies, however, were undeterred and continued to expand in the rich and profitable Mexican oil resources. The oil companies escaped major property damage associated with the Mexican Revolution owing to their location along the coastal periphery of the country and by paying for protection (Wright, 1971). Mexico became the second-largest oil producer after the United States in 1918, mainly owing to the large-scale American FDI in the industry. In 1919, practically every sizable American oil company had oil lands in Mexico with total FDI of at least $200 million. Although American FDI in mining in Mexico was higher at $222 million, the petroleum revenues of American companies exceeded the mining revenues of American companies (Wilkins, 1974). 7 The ten largest oil producing countries were the United States, Venezuela, USSR, Mexico, Iran, Dutch East Indies, Rumania, Colombia, Peru and Argentina (Wilkins, 1974). 8 By 1929, efforts by American investors to develop petroleum resources in many countries had been thwarted by host government policies or policies of colonial or imperial governing powers. This had been the case in Asia and Africa where the British and, to a lesser extent, other European governments tried to limit American stakes. The Japanese had also interfered with American FDI in Soviet-held Northern

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Sakhalin. The United States government often, but not always, tried to assist American companies in their negotiations with foreign governments (Wilkins, 1974). 9 Based on data contained in Wilkins (1974). 10 This included inter alia restrictions on profit remittances, controls on capital repatriation, extensive state intervention, higher taxes, state companies that competed with private enterprises, and nationalization (Wilkins, 1974). 11 For example, American companies encountered an entirely new investment environment in the infantile oil industry of the Middle East. Nationalist fervours in Latin America also worked against large, foreign-owned petroleum enterprises. Foreign oil companies had also become enmeshed in a Mexican government-backed labour dispute. In Japan, the Petroleum Control Bill passed in 1934 introduced price controls, new conditions on government sales and a requirement that six months of oil stocks be held in Japan by all importers and refineries in order to boost Japanese oil reserves. Government policies in Europe also confronted foreign oil companies. Import quotas, exchange restrictions, price-fixing regulations, enforced use of alcohol and other petroleum substitutes, new taxation, blocking of profit remittances, export subsidies and reciprocal trade agreements between foreign countries affected directly the petroleum operations of foreign companies (Wilkins, 1974). 12 Jersey Standard had become the largest American oil producer in Venezuela through its purchase of the foreign properties of the Pan American Petroleum & Transport Company. Although much of this oil was refined in Aruba and then shipped to Europe, some was shipped in crude form at a later stage with the establishment of refineries in Europe (Wilkins, 1974). 13 The principal new joint ventures in petroleum concluded abroad in the 1930s involved the following activities: (1) refining as in the cases of the Société FrancoAméricaine de Raffinage and Mitsubishi Oil Company; (2) marketing and seeking oil supplies as in the cases of Stanvac and Caltex; and (3) petroleum exploration and production as in the cases of cooperative efforts in the Middle East, the Dutch East Indies and Latin America (Wilkins, 1974). 14 Of the 58 foreign refineries, 28 refineries belonged to the Standard Oil of New Jersey, 15 refineries belonged to Socony-Vacuum, 7 refineries belonged to Texaco and the rest were refineries of other American petroleum companies. At the end of the 1930s, there were still no American refineries in consumer countries in Africa, Asia and Oceania where, with the exception of Japan, American petroleum companies continued to sell imported refined oil (Wilkins, 1974). 15 By contrast, there had been only three large companies in the world oil industry in 1929: Standard Oil of New Jersey, Royal Dutch Shell and the Anglo-Iranian Oil Company (Wilkins, 1974). The increase in the number of large companies by 1939 had thus been brought about by the emergence and expansion abroad of other American petroleum companies. 16 American subsidiaries and affiliates in India, Australia, Northern Rhodesia, the Gold Coast, Latin America and elsewhere fulfilled a similar purpose (Wilkins, 1974).

The evolution of multinational corporations from the United States: the period since 1914 17 Wartime destruction had left much of Europe and Japan in ruins and dollar shortages delayed economic recovery. As a result, government restraints in commerce and exchange transactions became the norm, as with currency depreciation in relation to the dollar. American investors feared the spread of communism as well as the general rise of public sector activities abroad. American businesses in foreign countries experienced further sizable losses as a consequence of expropriation in both communist and non-communist countries. These uncertainties abroad more than the threat of antitrust actions in the United States rendered American MNCs to be cautious about FDI. To the extent that antitrust cases affected American FDI, it made American firms realize that the crutch of private international agreements as a means of survival in foreign markets was unsustainable. Thus, as private international agreements regulating trade was past, the way was open for more complex multinational organizations. The development of these more complex organizational structures of American industrial MNCs administered through managerial hierarchies was described by Chandler (1980). 18 Figures were derived from the most recently revised data contained in the US Department of Commerce, Survey of Current Business, February 1981. 19 The imposition of mandatory controls was owing to the ineffectiveness of the voluntary balance-of-payments (BOP) programme announced in February 1965 to cope with BOP deficits. This voluntary programme urged some 500 large corporations to improve their individual BOP by raising exports, bringing in more income from abroad, repatriating short-term assets and borrowing in developed countries instead of exporting funds from the United States or reinvesting monies earned overseas. The guidelines applied initially to investments in developed countries, excluding Canada but the guidelines were extended to Canada and the less developed oil-producing countries in 1966. The imposition of mandatory controls on FDI in 1968, however, did not apply to Canada (where American companies were allowed unlimited FDI but were required to report their Canadian transactions) and to less developed countries. In certain other countries (United Kingdom, Australia, Japan and the oil-producing countries of the Middle East), investments would be curtailed; and in industrial Europe no new capital would be allowed to flow from the United States, but a specified percentage share of the profits earned abroad could be reinvested (Wilkins, 1974). 20 Apart from convenience, the use of reinvested earnings to finance FDI also served to circumvent controls on profit remittances by the host country as well as taxes imposed by the United States on dividends, and fulfilled the need of foreign subsidiaries to reinvest before the funds depreciated in value. Thus, despite the paradox of dollar shortages, import licensing, restrictions of remittances, and similar obstacles to foreign trade and FDI in the postwar years, the level of American FDI continued to increase. 21 For a further discussion of the financing of American FDI in the period since the Second World War, see Sestáková (1989). 22 Among the most significant American firms in public utilities were International Telephone and Telegraph and the American & Foreign Power Company. American

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FDI in this sector tended to be concentrated in Spain, Italy and the developing countries where the demand for public utilities could not be met by indigenous firms (Wilkins, 1974). 23 In England, where a Labour government had been elected, American companies reconverted to peacetime production while facing state intervention unprecedented in peacetime Britain. On the European continent, war had disrupted operations and it was not until 1946–1948 did the prospects for recovery seem at all promising. Nonetheless, Cold War anxieties, restrictions on foreign remittances and trade as well as government attempts at planning persisted and hindered American FDI in European manufacturing. Nevertheless, some American companies with sales subsidiaries and the desire to keep, renew, or establish markets in soft currency areas did establish new production facilities in Europe (Wilkins, 1974). 24 A case in point was the technologically advanced aviation industry of the United States which was exceptionally slow in embarking in FDI until the end of the 1960s (Wilkins, 1974). 25 For example, the US Steel Corporation which ranked among the top 12 companies in sales in American industry for several decades was not a prominent player in international production. In the period of the company’s technological leadership in the early 1900s, the firm met foreign demand through exports or the establishment of sales outlets abroad but did not engage in international production to a great extent. By the late 1950s and 1960s the company lacked the technological leadership in world industry as well as a network of foreign plants to provide a basis for major expansion, unlike the leading American car companies. The growth of its outward FDI since has been more significant in mining than in manufacturing (Wilkins, 1974). 26 The FDI intensity is measured typically in one of two ways: the first is in terms of the ratio of some measure of the size of FDI activity in the industry to the total size of the industry. Size can be measured by value added, assets, employment or profits (Pugel, 1981). Alternatively, FDI intensity can be measured in terms of degree of penetration in particular host countries (Pugel, 1985). 27 Export competitiveness was measured as the share of American MNCs in exports of manufactures of the market economies (Kravis and Lipsey, 1992). 28 In a similar fashion, the pioneering American firms in the meat packing industry that had gone abroad before the First World War was a reflection of the fact that the industry once belonged to the five largest American industries in revenues. The industry declined in importance by the 1960s, and its leading firms no longer made significant foreign investments, thus mirroring their loss of position in American industry (Wilkins, 1974). 29 For example, the most important manufacturing industries for American MNCs by the size of outward FDI stock in 1987 were in declining order: chemicals and allied products, machinery except electrical, transportation equipment, food and related products, and electrical and electronic equipment. By 1997, the most important manufacturing industries of American MNCs were in declining order: chemicals and allied products, food and related products, transportation equipment, electronic and

The evolution of multinational corporations from the United States: the period since 1914 other electrical equipment, and industrial machinery and equipment. The above statements were based on data contained in US Department of Commerce, Survey of Current Business, August 1992 and October 1998 for the 1987 data and 1997 data, respectively. 30 The information for 1960 and 1970 was calculated from data contained in US Department of Commerce, Survey of Current Business, February 1981. The information for 1989 was calculated from data contained in United States Direct Investment Abroad: 1989 Benchmark Survey, Final Results, Washington, DC: US Government Printing Office, October 1992. The data for 1997 was calculated from data contained in US Department of Commerce, Survey of Current Business, October 1998. 31 The investment obstacles faced by American petroleum companies ranged from antitrust action at home to expropriation risks (in Eastern Europe and China), creeping exports (in many countries), political instability, labour difficulties, dollar shortages, restraints on trade and payments, investment control laws, legislation excluding their participation, foreign government intervention, etc. Despite this, the stock of American FDI in petroleum grew the fastest—by 142 per cent—between 1946 and 1950, while that in manufacturing and mining grew more modestly at 60 per cent and 41 per cent, respectively (based on data in Wilkins, 1974). 32 As in the past, mining companies engaged in foreign mining when faced with shortages at home and the need to supplement domestic or world resources with cheaper sources of supply. Manufacturing companies invested in mining abroad to obtain raw materials. For example, the aluminium companies sought bauxite, the steel enterprises sought iron ore and various types of manufacturers sought specialty metals such as manganese and chrome. Oil companies moved into foreign mining as part of their diversification strategies (Wilkins, 1974). 33 The United States government guaranty programme for new investments that was initiated with the European recovery plans in the immediate aftermath of the Second World War was applied exclusively to underdeveloped nations in the late 1950s and 1960s. The Agency for International Development acquired other functions to encourage American FDI in less developed countries: making dollar loans to private American investors abroad, conducting foreign investment surveys and giving information on investment projects. This was complemented by government measures to protect investments such as, for example, the Hickenlooper Amendment to the Foreign Assistance Act in which foreign aid to a particular nation would be withdrawn should any expropriation of American properties after 1 January 1962 not be followed by prompt and adequate compensation (Wilkins, 1974). 34 The Treaty of Rome creating the European Economic Community (EC) was signed by the governments of Benelux, West Germany, France and Italy on 25 March 1957. When negotiations for the United Kingdom’s entry into the EC collapsed in January 1963, American businesses that expected to export from Britain to the continent began to make new investments in the EC (Wilkins, 1974). 35 For example, American investors made some supply-oriented investments in electronic plants in South Korea, Taiwan and Hong Kong in the 1960s to take

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advantage of cheap labour with a high degree of dexterity. The output was sent to the United States or was incorporated in final products in a third country (generally Japan) for sale in that country, the United States or even in a fourth country (Henderson, 1989). 36 American companies also gained entry in European colonial territories, although the level of their stakes did not exceed those of the imperial power. Generally, American investors acted through companies incorporated in the imperial nation and used managers of the nationality of the imperial power. With independence, Americans invested directly and dealt with national rather than imperial sovereignties (Wilkins, 1974). 37 Based on data contained in US Department of Commerce, Survey of Current Business. October 1998.

4 The emergence and evolution of multinational corporations from Sweden Introduction Although a far smaller country than the United States, the resource abundant country of Sweden has always been engaged actively in outward FDI and engendered one of the oldest MNCs in the world economy. By 1960, Sweden accounted for 0.6 per cent share of the global stock of outward FDI which increased significantly to 1.7 per cent in 1975 and 2.9 per cent in 1990, but its share declined slightly to 2.3 per cent in 1998 despite the near doubling of its stock of outward FDI between 1990 and 1998.1 Notwithstanding the low relative importance of Swedish FDI, the study of the emergence and evolution of Swedish MNCs is of interest not the least because although Sweden has a far smaller domestic market, the growth pattern of their MNCs can be compared to that of American MNCs whose home country shares a similar natural resource abundance. Swedish MNCs feature among the most important companies in Sweden—accounting for more than half of the domestic industrial workforce and more than half of the country’s exports in the 1990s (Olsson, 1993). Although an overwhelming proportion of its outward FDI has always been concentrated in a few firms, the population of Swedish MNCs consist of many small firms.2 Thus, the analysis of Swedish MNCs shows that size of firms is not a useful indicator of the propensity to engage in outward FDI, and that the determinants of international production does not always derive from oligopolistic market conditions. Rather, it is the size of the firm relative to its home market that determines the propensity to engage in international production. Firm size is more a reflection of a firm-specific advantage than a major source of such an advantage (Swedenborg, 1979). There is a rapid process of internationalization through exports and international production by Swedish firms owing to the need to overcome the limited size of the domestic market. Internationalization of sales and manufacturing operations were motivated mainly by the desire to expand markets and attain economies of scale. Indeed, Sweden—as with small countries in general—has had earlier forays into international markets and a relatively larger international economic involvement by comparison to the United States (Swedenborg, 1973).3 Hence, Swedish firms, as with firms based in other small countries such as Switzerland and Singapore, have always had an offensive and aggressive market expansion strategy (see Chapters 13 and 15). Newly established Swedish firms with a significant competitive advantage (often a superior technology) became international companies typically after only a few years, and many technology

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intensive smaller firms felt the need to increase sales and sustain growth outside the confines of a rapidly saturated small domestic market. The choice between exports and international production tended to be determined by the balance of locational advantages in the home and host countries. International production in host countries was favoured by trade barriers and/or high transportation costs, the need to establish closer ties with local customers to support sales and the need for a local presence. Foreign plants served to maintain or increase foreign sales through the final assembly of products and/or modifications or adaptations of products designed essentially for the Swedish market. The local adaptations associated with international production have led, in some cases, to a broadening of the product range, but rarely had an impact on basic product design or new product development for the Swedish firm. Neither did international production involve the most skilled labour or relationships with local research institutions in foreign countries (Sölvell et al., 1991). In the interest of achieving consistency with Olsson (1993), the analysis of the history of Swedish MNCs in this chapter covering the major determinants of Swedish FDI and their industrial and geographical patterns is conducted in three time frames: the late nineteenth century to the First World War, from the First World War to 1960, and from 1960 to the present.

The emergence of Swedish MNCs from the late nineteenth century to the First World War During the period of the emergence of Swedish MNCs in the late 1800s and until the beginning of the twentieth century, there were two main groups of Swedish export industries (Olsson, 1993). The dominant group of Swedish export industries were those based on raw materials (wood, pulp and metal ores) whose principal markets for centuries were the more industrialized countries of Europe. Between the beginning of the twentieth century and the First World War, half of Sweden’s exports comprised forestry products sold mainly to Great Britain and iron and steel sold to Germany, and a further third by agricultural products such as oats and butter (see also Hörnell and Vahlne, 1986). Indeed, it was the industrialization of Great Britain and the subsequent expansion of building and construction activities in that country that led to the substantial increase in demand for timber products from Sweden between 1850 and 1880. Similarly, industrialization in other parts of Europe (particularly Germany) led to increased demand for iron and steel where Sweden had a comparative advantage in production owing to its favoured access to energy (charcoal). Since Swedish legislation prohibited foreigners from owning Swedish land, these staple industries remained largely in the domain of domestic firms. Raw materials continued to describe the export pattern of Sweden even until 1953 when it accounted for some 43 per cent share of merchandise exports; such share, however, has declined rapidly since (based on data in Söderström, 1980). Firms in the industries of mining, metal production and forestry developed their domestic production based on numerous small units in close proximity to the sources of raw materials and energy, and their exports were handled typically by merchant houses based in the major ports of

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Stockholm and Gothenburg that also provided working capital (Carlson, 1977). These firms became MNCs only to a very limited extent. The second group of export industries comprised those of modern engineering generally consisting of metal manufactures, machinery and transport equipment whose growth was fostered by the presence of abundant natural resources in Sweden. In combination with export earnings from wood and iron products which financed the establishment of new industrial companies, the technical and metallurgical know-how developed from iron and steel production proved useful to the development of the modern engineering industry in the industrialization phase between 1870 and the First World War (Lundström, 1986). The long tradition of metal manufacturing based originally on iron and steel production from the local presence of abundant high-quality iron ore was enhanced by other country-specific advantages to include major investments in technological education and training, the large degree of trade orientation and the close personal contacts within the Swedish industrial establishment which favoured the rapid absorption and adaptation of technological innovations, and their application in modern industrial production in the engineering industry (Nabseth, 1974). The growth of specialized engineering firms was a manifestation of an emerging structural change in the domestic production and export patterns of Sweden. Since these firms were geared towards exports at an early stage in their development, the country developed rapidly a more advanced export industry based on engineering products in addition to the more traditional, staple oriented ones (Olsson, 1993). However, unlike the firms in the staple industries, the high-quality steel mills and the new industrial companies based on mechanical engineering established direct contacts with foreign markets by employing travelling salesmen (Hörnell and Vahlne, 1986) owing to increased product differentiation (e.g. production of special steel versus ordinary steel), and the necessity to have intimate knowledge of market developments and to adapt products to customers’ particular needs (Carlson, 1977). Their growth enabled Swedish exports to have a wider geographical scope to include not only the leading industrial countries of Europe, but also developing countries. Russia was, in fact, the largest foreign market for the Swedish engineering industry at the turn of the century (Lundström, 1986). The rapid change in the industrial and geographical pattern of its exports enabled Sweden to occupy an important position in international trade. Unlike the firms based in the raw materials industry, most of the early FDI of the early exporting firms in the engineering industry stemmed from the need to establish a firm market presence abroad. Indeed, Swedish MNCs have come to emerge and evolve in the engineering industry and not in the raw materials industry. Thus, during the period of the emergence of Swedish MNCs in the late 1800s there seems to have been a disparity in the industrial distribution of exports and outward FDI of Sweden and, hence, greater scope for substitution between these two alternative modes of internationalization.4 Indeed, one striking difference between Sweden and the larger sized but also resource-rich United States lies in the relative importance of outward FDI to exploit foreign raw materials during the period of emergence of their MNCs. This is explained in the context of the development of competitive advantages by Swedish industry in the extraction and processing of domestically available raw materials in a small country in relation to the

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large scale in which most investment in raw materials is undertaken typically (Swedenborg, 1979). The lesser significance of outward FDI in raw materials and the increased propensity of engineering firms to engage in outward FDI has made the manufacturing sector the most important sector for Swedish MNCs during the period of their emergence. The growth of the engineering industry as an outcome of the Swedish industrialization phase between 1870 and the First World War can thus be regarded as the period of emergence of Swedish MNCs. The first Swedish MNCs consisting of technologically innovative firms in the engineering industry came into their own starting around the late 1800s, and their emergence can be explained as much by the need of firms from small countries to pursue an offensive and aggressive strategy to search for markets as by the need to overcome the threat posed to exports growth by the trend towards international industrial protectionism and high transportation costs.5 Through international production supported by large, internationally oriented investment banks and the government, the process of internationalization of Swedish firms proceeded in this period of dynamic industrial change. The traditional pattern of a gradual process of growth and development of innovative Swedish engineering firms can be regarded as consistent with that of firms from larger domestic markets: after mechanizing and specializing in a technically advanced product, firms secured the home base and engaged in exports to achieve scale economies; this was associated with the use of a network of agents or representatives (or travelling salesmen) and then by the establishment of a sales subsidiary abroad; and, finally, by the initiation of international production. This incremental process of establishment which has been described as an ‘establishment chain’ by Johanson and Wiedersheim-Paul (1975) can also be analysed within the framework of the product cycle model of Vernon (1966). There were, of course, exceptions to this growth pattern in some Swedish firms. The substantial growth of Svenska Kullagerfabriken (SKF)—the ball and roller bearing company formed in 1907—was initiated and established in the most important large-sized foreign markets of Britain, France, United States and Russia. It was only with the standardization of production and the industrialization of Sweden that the home market assumed significance to the firm. This was owing to the preference of Swedish consumers and industries for the old type of ball bearings made in Germany, unlike the consumers in Britain, France and the United States that preferred ball bearings made in Sweden (Lundström, 1986). Some other firms often had to wait for the domestic market to be large enough or modern enough to become the market base for a more specialized product (Olsson, 1993). Other exceptions emerged in cases where there was a necessity to engage in international production at once and bypass exports in order to gain access to an important foreign market. This was the case when the foreign customer was a public authority and therefore it became an outright requirement to have a local presence by the initiation of international production. This factor influenced largely the rapid development of some Swedish firms to become MNCs in this period. Among these were firms engaged in the production of generators and turbines for hydroelectric plants (ASEA), beacons and lighthouses equipment (AGA), and telephone systems (Ericsson) (Olsson, 1993; Lundström, 1986).

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To the limited extent that Swedish firms in industries based on raw materials became MNCs in this period, this took the form of backward vertical integration in foreign countries. This was evident in the case of some firms in the forestry industry which tried to enlarge their own timber supplies by establishing subsidiaries in Finland and Russia, and to manufacturing firms that aimed to secure the supply of aspen splint for match fabrication (Swedish Match), cork (Wicander), or that attempted to produce chromium for steel production (Sandvik) (Olsson, 1993; Lundström, 1986). Forward integration by firms in staple industries to establish production closer to final markets abroad as well as horizontal integration to exploit accumulated know-how in resource extraction and processing in foreign markets belonged to a much later stage in the history of the growth and development of Swedish MNCs (Olsson, 1993).

The growth of Swedish MNCs from the First World War to 1960 The First World War reinforced the importance of international production both for political reasons and because of the physical barriers to trade that resulted from the hostilities. The political neutrality of Sweden during the war enabled the continued expansion of their MNCs in a way that was less possible or more difficult for firms from aligned countries.6 The Russian Revolution of 1917 had perhaps a more profound negative impact on Swedish MNCs than the First World War since this led to the disappearance of an important export market (Russia), and the nationalization of several subsidiaries in that country without compensation (see Lundström, 1986).7 Despite the slow growth in the 1920s, Sweden continued its industrial transformation through technological knowledge accumulation and, as a consequence, developed into a modern industrial nation. Several new Swedish MNCs were established in the exportoriented era of the 1920s, and in particular by firms within groups of industrial companies created in the inter-war period by the leading commercial banks.8 The rationale for international production was to circumvent trade barriers and to build commitment in important foreign markets. As a result, Sweden started to became a net exporter of capital, much of it in the form of FDI. By the end of the 1920s, there were at least 50 companies with production subsidiaries abroad (Lundström, 1986). The most notable of these companies was the Swedish Match Company which had no less than 144 producing units abroad in 33 different countries. In many ways, the match empire established by the Swedish entrepreneur Ivar Kreuger was an exceptional Swedish MNC, not only in terms of its large size but also in terms of its method of internationalization. The latter ran the gamut of large-scale acquisitions to funding large state loans in return for obtaining national match monopolies in no fewer than 15 countries, and other means of ruthless oligopolistic power play including negotiated price and trade agreements with the other large match companies in the world (Hassbring, 1979; Lindgren, 1979; Wikander, 1980). The international depression of the 1930s led to the reduction in significance of international trade owing to increasing tariff barriers and trade wars. The share of Swedish exports to GNP declined substantially in this decade by comparison to the two

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preceding decades, and not until the 1960s was the share back to its level in the 1920s. There was also a smaller number of new Swedish MNCs established in this decade than during the previous decades (Sölvell et al., 1991).9 For those few firms that initiated international production in this decade and for already established MNCs, the impetus to international production was provided by host country-related locational advantages owing to trade barriers, high transportation costs and political factors. Indeed, most Swedish MNCs reported relatively high financial gains between the mid-1930s and 1944 comparable to that of the period up to and including the First World War (Wohlert, 1989). The tendency for fewer Swedish manufacturing MNCs to be established grew even stronger in the 1940s and through the Second World War. Recovery was not forthcoming until the 1950s when the number of new manufacturing MNCs established reached those before the crisis of the 1930s. Unlike in the First World War, the Second World War led to the destruction and loss of property of Swedish MNCs in Eastern Europe, and involved risks to Swedish MNCs generally despite the continuing political neutrality of Sweden.10 Despite this and the reduced foreign trade during this period, the volume of domestic production and profits in the engineering industry was maintained owing to the industry’s strategic importance to the national rearmament process initiated in the mid-1930s. In particular, the production of defence material provided an important technological impetus to the industry and many firms were established with the support of the government.11 Indeed, some of the most research intensive firms of the engineering industry in the period after the Second World War profited from large state orders associated with the heavy investment in a domestically based technologically advanced armaments production involving leading engineering firms (Olsson, 1977). The period of rearmament thus formed an important basis for the further growth and development of Swedish industry and MNCs in future years (Olsson, 1993).

The development of Swedish MNCs from 1960 to the present The development of Sweden into a technologically sophisticated industrial country since the Second World War (Wohlert, 1989) in combination with international economic growth and the liberalization of world trade had profound and positive effects on its exports and international production. Although the share of exports to GNP reached 35 per cent during the 1970s, foreign trade was forming a smaller part of the international economic activities of Swedish firms compared to international production that was playing an increasingly important role. Indeed, Swedish outward FDI increased strongly from the 1950s onwards (Hörnell and Vahlne, 1986). As in previous eras, international production in this period was carried out mainly by industrial firms reflecting the stability in the industrial structure of Swedish MNCs, although firms from other sectors have increased their outward FDI in more recent decades. In the mid-1980s, some three-quarters of the total outward stock of Swedish FDI continued to be accounted for by industrial firms, while the remaining was owned by companies in the financial and service sectors. This owed partly to the liberalization of

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foreign exchange controls in Sweden as well as investments in financial assets and property abroad which resulted in much of the annual growth in Swedish outward FDI since 1987 accounted for by large property investments abroad (Olsson, 1993). The period since the 1960s described a metamorphosis in the process of internationalization by some Swedish manufacturing companies away from the traditional and gradual pattern of an establishment chain described by Johanson and Wiedersheim-Paul (1975) towards a more rapid and direct process described by Nordström (1991) owing to a combination of factors to include firm characteristics (other than knowledge and experience), host country characteristics and home, host and international industry structures. As a result, there has been an increasing tendency for Swedish manufacturing companies that initiated the internationalization process since the 1960s to leapfrog some of the stages of establishment by having sales as well as production subsidiaries abroad at an early stage, to invest in relatively more distant foreign countries that have market potential (such as the United States) at an early stage with the use in many cases of the modes of acquisitions and cooperative ventures rather than greenfield investments and the establishment of wholly owned foreign subsidiaries. Thus, while acquisitions accounted for less than 40 per cent of Swedish outward FDI in the 1960s, this proportion increased rapidly to over 60 per cent in the 1970s (Hörnell and Vahlne, 1986). Some 75 per cent of all foreign subsidiaries established by Swedish firms between 1979 and 1986 were acquired rather than started as greenfield projects, including those developed out of sales or service companies. This is associated with the need of Swedish firms to accelerate rapidly the internationalization process by obtaining new technologies, a product range or brand name, a net of subcontractors, a sales organization, or to gain rapid market share in both very fast and very slow growing industries (Olsson, 1993; Nordström, 1991). Sometimes, foreign acquisitions were made as part of structural rationalizations of companies in which firms focus their efforts narrowly on products and applications that emerge from their original technological specializations. Acquisitions of other enterprises within the same lines of production served to enhance the specialization of inventive Swedish enterprises within the engineering industry. However, even less R&D intensive industries or firms (e.g. Esselte) have chosen to move away from unprofitable business activities towards more profitable ones by the acquisition of other enterprises in more profitable lines of activities (Söderström, 1980). The 1960s and 1970s marked the rapid growth in international production of the forestry firms in the form of vertical integration achieved through the full or partial acquisition of their major foreign customers—a move in response to the entry of the North American pulp and paper firms in Western Europe at the end of the 1950s (Carlson, 1977). Billerud, presently owned by Stora and SCA, featured among the most internationally active Swedish firms in the pulp and paper industry in the 1960s. Other firms with foreign plants included ASSI, Fiskeby, Korsnäs-Marma, NCB and MoDo (Sölvell et al., 1991).12 Apart from the few examples of firms in the forestry industries engaging in outward FDI to gain access to raw materials in Canada and the United States, and the production of pulp based on domestic raw materials in Portugal, Canada and Brazil (Söderström, 1980; Olsson, 1993) to safeguard their future expansion, the more

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recent pattern of outward FDI by Swedish firms in resource-based industries was quite unlike their more limited FDI in the form of backward vertical integration in resource extraction between the late 1800s and 1914. Forward integration by firms in staple industries to establish production closer to the final markets abroad as well as horizontal integration to exploit accumulated know-how in resource extraction and processing in foreign markets was motivated as much by the profitable exploitation of accumulated know-how and skills in extraction and processing of natural resources (Swedenborg, 1979) as by the need to gain market knowledge and to influence product development in the pulp- and paper-consuming industries (Carlson, 1977). In the early 1970s, the Swedish pulp and paper manufacturers had established more than 40 manufacturing plants abroad, mostly in the United Kingdom and Germany, and the further growth of their European investments in the 1970s and 1980s enabled the Swedish pulp and paper companies to build dominant market positions (Sölvell et al., 1991). After the domestic industrial crisis of the 1970s when the traditional industries producing pulp and paper, minerals, metal and steel, shipbuilding, etc. experienced heavy setbacks and underwent painful restructuring, the technologically more advanced and more internationalized engineering firms displayed better ability to adjust. The emphasis thereafter laid on upgrading domestic production as reflected in the significant reduction in the share of merchandise exports derived from raw materials (wood, pulp and metal ores) from 43 per cent in 1953 to 12 per cent in 1978, and a dramatic increase in the share derived from specialized and rather advanced engineering products from 24 per cent to 47 per cent over the same period (based on data in Söderström, 1980). As a result, there had been a rapidly increasing congruence in the industrial pattern of exports and outward FDI of Sweden since 1953. Developed countries continued to receive a dominant share of Swedish FDI in the period since 1960, with some 83 per cent of employment in Swedish manufacturing subsidiaries abroad (Olsson, 1993). This was because Swedish industry regarded it as necessary to invest within the tariff walls of the emerging regional market of the European Community (EC) during the 1950s and 1960s, while Sweden as a member of the European Free Trade Area (EFTA) could service the markets of the other EFTA member states more efficiently through exports (Hörnell and Vahlne, 1986). The free trade agreement concluded between EFTA and the EC in 1972 combined with the expectation of slower growth in Europe and the high market shares already held by Swedish firms led to a slowdown in the growth of Swedish FDI in the EC, and to a corresponding growth of FDI in the United States during the 1970s and 1980s.13 Regardless of the physical and psychic distance, the large size, technical sophistication and growth potential of the United States market attracted not only small and inexperienced Swedish manufacturing firms that began their internationalization process after 1977 but also large, already well-established Swedish MNCs particularly in industries with a high degree of international competition (Nordström, 1991). The renewed importance of Europe for Swedish FDI since 1986 took place in the context of the formation of the Single European Market and the expectation of rapid growth and dynamic industrial development as well as the continuing uncertainty about Sweden’s future relations with the EC. Pulp and paper firms have been inclined to invest

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in the EC, as mentioned, particularly in the last stage of the production process.14 Thus, through vertical integration, Swedish pulp and paper firms secured important segments of the final markets in Europe, and some firms, such as Stora and SCA, consolidated their leading positions in Europe through larger acquisitions (Sölvell et al., 1991). Similarly, the more established skills-intensive engineering firms carried on investing in Europe to gain larger shares of a growing market, while the younger, highly specialized and R&D intensive firms became MNCs to gain a foothold in the European market. As a result, there was a doubling of outward FDI flows in the EC in every year from 1985 to 1988 (Olsson, 1993). Since the 1980s, the importance of production and sales in Sweden for Swedish manufacturing companies—including those in the resource-based industries—continued to decline by comparison to their production and sales abroad.15 This confirms a general trend that domestic and foreign production do not grow at the same rate over time, with domestic growth preceding growth in foreign markets typically in the early stages, but growth through foreign production once initiated exceeds domestic growth at later stages (Swedenborg, 1979). Although this trend applies rather more to MNCs in the engineering industry that have a longer history of international production, it is also applicable to the resource-based industrial firms whose international production had become increasingly important since the 1960s. Indeed, by the late 1980s, the leading pulp and paper firms— Stora, MoDo, SCA and ASSI—had 50 per cent of their total employment abroad (Sölvell et al., 1991). Apart from these firms, other firms in the mining and steel industries have also invested in major foreign operations abroad in the 1980s (Sölvell et al., 1991).16 Not only has there been a more rapid pace in the internationalization process of Swedish firms in more recent decades with the tendency to leapfrog some of the stages of establishment and the approach of relatively more distant markets early on (Nördstrom, 1991) but also a change in the determinants of internationalization. The rapid internationalization of young technology-based firms in recent decades reflect efforts not only to increase sales but to establish closer contacts with markets where important technological developments in the industry take place (Lindqvist, 1991). In a limited number of Swedish industries, sophisticated foreign demand has substituted for having advanced customers in the home market in providing the crucial pressures and challenges for new product development; but this was selective and could not have worked without the support from a dynamic home base (Sölvell et al., 1991).17 More importantly, the high international orientation of Swedish firms and MNCs have fostered learning and upgrading of their core skills and technologies assisted by the establishment of specialized product centres in different countries, the establishment of core R&D operations tied to major foreign plants, the relocation of the corporate headquarters or the divisional and business units to another country, and the use of new modes of international investment, including mergers and acquisitions as well as the formation of strategic alliances with foreign firms. By establishing specialized product centres or several home bases for each product or technology area, leading Swedish MNCs such as SKF, Atlas Copco, Electrolux, Ericsson and ABB and Fläkt have attained scale economies and gained from the concentration of research and/or production in the most advantageous location. The 20 largest Swedish MNCs perform some one-quarter of

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all R&D abroad and, in addition, have been involved heavily in international research programmes to have an influence in the standards set by industry organizations, to enhance technological skills and to establish contacts with competitors and customers (Håkanson and Nobel, 1989; Håkanson, 1990). The establishment of foreign-based research and/or production in the electronics and pharmaceuticals industries in particular enabled Swedish firms to have listening posts in centres of innovation around the world, to tap into special research competencies in certain countries, to establish networks with foreign research institutions, and to recruit foreign specialists (Sölvell et al., 1991). With the increasing importance of international production, the firm-specific advantages of Swedish firms and MNCs have drawn increasingly from their ability to develop new technologies in a narrow range of products that formed the basis of their specialization and world leadership owing to quality, service and market knowledge. Their growth strategies are evolving rapidly as seen both in the faster pace of the process of their internationalization and in the rationalization of the structure of their international production activities that facilitate cross-border product or process specialization and learning from producing in different environments. Since some foreign affiliates have become increasingly instrumental in the strategy formulation of the MNC of which they are a part, the organizational pattern of some Swedish MNCs have changed from a hierarchical system of decision making to a heterarchical system associated with globally integrated MNCs (Hedlund, 1984).

Conclusion This chapter analysed the emergence and evolution of Swedish MNCs since the late nineteenth century. It showed the more rapid process of internationalization through exports and outward FDI of firms based in small countries compared to firms based in larger countries as an important means to expand markets and attain economies of scale. Although there has been a closer similarity in the industrial distribution of exports and outward FDI of Sweden since 1953, there was a much greater industrial disparity and hence greater scope for substitution between trade and outward FDI of Sweden during the period of the emergence of Swedish MNCs in the late 1800s. Indeed, firms in the dominant group of Swedish export industries based on raw materials (wood, pulp and metal ores) became MNCs only to a very limited extent during the period of emergence of Swedish MNCs, while those engaged in the domestic production and exports in the engineering industry consisting of metal manufactures, machinery and transport equipment, engendered the emergence of the first Swedish MNCs in a more significant way in the late 1800s. The increasing importance of international production by the more resource-based industrial firms became evident in a major way only since the 1960s. Forward integration by firms in staple industries to establish production closer to the final markets abroad as well as horizontal integration to exploit accumulated know-how in resource extraction and processing in foreign markets was motivated as much by the profitable exploitation of accumulated know-how and skills in extraction and processing of natural resources (Swedenborg, 1979) as by the need to gain market knowledge and to

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influence market development in the pulp- and paper-consuming industries (Carlson, 1977). The period since the 1960s also describes the metamorphosis in the process of internationalization by some Swedish manufacturing companies away from the traditional and gradual pattern of an ‘establishment chain’ described by Johanson and Wiedersheim-Paul (1975) towards a more rapid and direct process described by Nördstrom (1991) with the marked tendency of Swedish MNCs that initiated international production since that decade to leapfrog some of the stages of establishment by having sales as well as production subsidiaries abroad at a much earlier stage of the internationalization process, to invest in relatively more distant foreign countries that have market potential (such as the United States) at an early stage with the use in many cases of the modes of acquisitions and cooperative ventures rather than greenfield investments and the establishment of wholly-owned foreign subsidiaries. This is associated with the changed determinants of outward FDI as a means not only to expand markets and attain scale economies but to establish closer contracts with markets where important technological developments in the industry take place (Lindqvist, 1991). As a result, the firm-specific advantages of Swedish MNCs have derived increasingly from their ability to develop new technologies in a narrow range of products that formed the basis of their specialization and world leadership.

Notes 1 Based on data contained in Tolentino (1993) for 1960 and 1975, and UNCTAD (1999) for 1990 and 1998. 2 In terms of number, there were some 82 Swedish firms with foreign production facilities in 1965, and 118 such firms in 1978 employing some 300,000 people abroad. Some 64 of the 118 Swedish MNCs were small companies with foreign employment of less than 2,000. There is a high degree of concentration within Swedish MNCs. In 1978, the 20 largest Swedish MNCs operating abroad were responsible for more than 80 per cent of all Swedish enterprises’ employment abroad (Hörnell and Vahlne, 1986). By 1982, 47 Swedish MNCs with more than 500 employees abroad accounted for 92 per cent of all foreign employment. The 15 largest accounted for 81 per cent (Sölvell et al., 1991). 3 In a cross-sectional analysis of practically all Swedish firms in the manufacturing sector in 1974, Swedenborg (1979) found that Swedish industry had a higher export intensity but a lower international production intensity than American industry. The higher export intensity of Swedish industry is explained by the need to exploit economies of scale in production in the face of a relatively small domestic market. The relatively small distance to major export markets favoured the exploitation of such scale economies. The corollary is that the lower export intensity and higher international production intensity of American industry is explained by the larger size of the United States in both an economic and geographic sense. 4 This is a finding that seems to be an exception to the general principle of a greater

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correlation in the sectoral distribution of the growth of exports and outward FDI for relatively newer investor countries such as Germany and Japan (see Cantwell, 1989a). By comparison, there is a much greater disparity in the sectoral distribution of growth of exports and outward FDI and, hence, greater scope for substitu-tion between trade and outward FDI for the more mature and established international investors such as the United Kingdom and the United States. 5 Among the pioneering Swedish MNCs were Alfred Nobel’s corporation, Nitroglycerin AB, which had already initiated production in ten different countries in the 1870s, as well as Alfa-Laval (through its forerunner company, AB Separator) which established its first foreign plant (milk separators) in the United States in 1883. Nobel (explosives) established a plant in Germany in 1886. Wikander (cork and linoleum floors) established plants in Finland and Russia in the late 1800s. Perstop (Skånska Ättiksfabriken) built a plant for acetic acid production in Norway in 1898. ASEA installed a factory in the United Kingdom in 1898 to adapt electrical machinery to local needs, and had equity ties with licensees in Finland (1897), Norway (1898) and Denmark (1900). Ericsson set up major manufacturing plants in Russia around the turn of the century. SKF, the most internationalized Swedish firm in manufacturing, expanded production around the First World War. Plants were established in the United Kingdom (1911), Germany (1914), United States (1916) and France (1917). AGA established a plant for lighthouse production in England in 1914 (Sölvell et al., 1991; Hörnell and Vahlne, 1986). 6 For example, the investments of SKF in the United States continued to flourish, while German producers of ball bearings in that country did not (Olsson, 1993). 7 As mentioned, Russia appeared to be the most promising market for Swedish industry during the period of Swedish industrialization, especially for the young engineering industry. Swedish exports to Russia soared and many Swedish companies founded Russian subsidiaries encouraged by the great success of the Nobels, Wicander, Ericsson and SAT (Lundström, 1986). 8 Leading commercial banks became owners of industrial shares used as collateral for loans. Thus Enskilda Bank, owned by the Wallenberg family, gradually became the nucleus of the largest industrial group (Olsson, 1993). 9 Among the Swedish firms that initiated international production in the 1920s and 1930s were Esab which opened up plants for welding consumables (electrical welding machinery) across Europe in the 1920s, with the first manufacturing unit initiated in Germany where superior electrical welding know-how existed. Svenska Flätfabriken (now ABB Fläkt) opened its foreign plants in the 1930s in Finland, Norway and France, and expansion continued in the 1950s in Europe, United States and Mexico. Atlas Copco established plants in the United Kingdom (1939), South Africa (1947), Brazil (1960), India (1962) and Germany (1970) (Sölvell et al., 1991). 10 During this time, SKF with production subsidiaries in Germany and the United States could not escape the conflict (Olsson, 1993). 11 An excellent case in point is SAAB (later SAAB-Scania) that was given a privileged start as a producer of aircraft by the government (Olsson, 1993).

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12 Almost all foreign paper plants of Swedish firms were specialized in either sack paper or paper board (Sölvell et al., 1991). 13 The value of international production by Swedish firms in the United States increased eightfold between 1979 and 1986 (the peak) compared to the value of Swedish exports to that country which increased only fourfold (Olsson, 1993). 14 It has not been possible to move the large scale basic processes out of Sweden since these had to remain close to the source of raw materials (Olsson, 1993). 15 Production in Sweden declined from 73 per cent to 53 per cent between 1965 and 1986 while production abroad increased from 27 per cent to 47 per cent over the same period. Sales in Sweden declined from 47 per cent in 1965 to 23 per cent in 1986, while sales abroad increased correspondingly from 53 per cent to 77 per cent (Olsson, 1993). The ten most internationalized Swedish MNCs reduced their domestic investments further by 14 per cent between 1985 and 1988 (Sölvell et al., 1991). 16 Gränges has operated mines abroad since the 1950s, notably the LAMCO mine in Liberia. Boliden acquired Greenes in Denmark in 1986 and Falconbridge in Canada in 1989, and operates mines in several countries (Sölvell et al., 1991). 17 Influences derived from international customers described the development of Inter-Innovation (the Swedish manufacturer of teller-operated cash dispensers) and Wallenius (the Swedish manufacturer of carrier ships for cars and trucks). Although Inter-Innovation developed within a strong domestic cluster of industries based on precision electro-mechanical know-how, domestic customers did not play a decisive role in the growth of the company. The growth impetus came from a large order from Citibank in 1979, followed by contracts from British and Spanish banks for teller-operated cash dispensers. Stringent product demands by foreign users in terms of quality and technological sophistication pressured the firm to upgrade its technology. By 1987, the firm derived only 5 per cent of its total sales in Sweden. Similarly, in the Swedish car shipping industry, contacts with foreign customers influenced the development of shipping design by Wallenius, helped by the presence of a strong domestic cluster of shipbuilding industries. Continuous technical development of carrier ships by Wallenius that led to the development of combined car-bulk carriers in 1974 and the pure car and truck carriers in 1977 was driven primarily by foreign customer needs (Sölvell et al., 1991).

5 The emergence and evolution of multinational corporations from Brazil Introduction By comparison to the long and rich history of MNCs based in other resource-abundant countries such as the United States and Sweden, the history of Brazilian MNCs whose origins can be traced to the late 1960s is much more recent and contemporary. Besides, the stock of Brazilian FDI which reached an estimated $9.8 billion in 1998 is far more modest and represented some 0.2 per cent of the global stock of outward FDI. Nevertheless, in relation to the stock of outward FDI from developing countries in that year, Brazil assumed greater relative importance with a share of 2.5 per cent (based on data in UNCTAD, 1999). Despite the low relative importance of Brazilian FDI, the study of the emergence and evolution of Brazilian MNCs is of interest not the least because Brazil, like the United States and Sweden, is a resource-abundant country. Thus, although the history of Brazilian MNCs may be of more recent vintage and is in many respects still in the stage of emergence and their outward FDI remains low in both absolute and relative terms, the growth pattern of their MNCs as it has been evolving over the last 30 years or so can be compared to that of MNCs from the United States and Sweden whose home countries share similar patterns of national economic development. The analysis of the history of Brazilian MNCs in this chapter is divided in two distinct phases: the period of emergence from the late 1960s to 1975, and the period of development in the period since 1975.

The emergence of Brazilian MNCs in the late 1960s to 1975 The pioneering Brazilian MNCs spanned the three sectors of economic activity. In the primary sector, there was the oil exploration and drilling activities by the state-owned firm, Petrobrás, while in the secondary sector there was the initiation of international production by local firms in bicycles (Calói), electrical equipment (Gradiente Electronics) and motor vehicle parts (Eluma and Marcopolo). Thus, although Brazil had one of the largest and most developed manufacturing sectors among developing countries, its outward FDI did not feature prominently in the manufacturing sector in the emergent phase of Brazilian MNCs. Indeed, apart from Petrobrás, the main thrust of the earliest outward FDI by Brazilian firms had been in services. Of these, the most significant were those firms involved in heavy civil construction in Nigeria, the Middle

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East and Latin America and the engineering consulting companies that set up foreign subsidiaries to build refineries, to design projects, etc. The emergence of Brazilian MNCs in the primary sector Concerns about chronic balance-of-payments deficits during the end of the era of vertical import substitution industrialization (ISI) (1955–70) prompted a political decision by the Brazilian government to search for new sources of foreign oil in light of Brazil’s position as a major importer of petroleum. Towards that end, Braspetro—a subsidiary of the stateowned oil monopolist Petrobrás—was created in 1972 to fulfil a strategic national interest of securing oil supplies abroad through risk contracts and close relations with OPEC countries. It became responsible for the foreign exploration, production, commerce, transportation and storage of oil and its products, as well as for the execution of technical and administrative services related to those activities (Guimaraes, 1986). Unlike American MNCs that emerged in a major way in outward FDI in the primary sector to exploit firm-specific assets in natural resource extraction and processing nurtured in the natural resource abundancy of the United States, the security of the supply of raw materials or natural resources as a motive for outward FDI in the emergent phase of Brazilian MNCs was rather unique to the Brazilian state-owned company Petrobrás, and specific to one natural resource—oil—given Brazil’s rich agricultural and mineral resources. The only other exceptional case of Brazilian resource-based FDI was the joint venture established with the Colombian government by the Brazilian state-owned steel enterprise, Siderbras, to exploit coal in Colombia with the objective of gaining independence from the United States for such raw material (White, 1981). In this respect, the Brazilian MNCs share more common features with Swedish MNCs where firms in the industries of mining, metal production and forestry became MNCs only to a very limited extent (see Chapter 4). The geographical scope of the foreign activities of Braspetro covered at least 14 countries. Exploration contracts were undertaken frequently in association with other companies, and primarily with state-owned firms in Iran, Egypt, Colombia, Algeria, Iraq, Angola and Congo of which in some cases it had some equity participation, as well as with large multinational oil companies such as Texaco, Mobil Oil, Cities Services, BP, Elf Aquitaine and Total (Guimaraes, 1986; White, 1981). In its various foreign activities, Braspetro drew upon the accumulated experience of its parent company in oil and gas exploration, geophysics and drilling—an advantage that had been enhanced by a training centre for engineers and middle-range professionals in the company’s Centre for Research and Development in Rio de Janeiro. Those assets in addition to learning by doing on its own outside Brazil enabled Braspetro to build up even more advanced engineering and managerial skills related to petroleum exploration and to progress over time to become its own profit centre and not simply an instrument of national policy. Evidence for this was found in its increasing ability to enter into risk investments and to render technical services in the construction and installation of oil rigs, refineries, storage systems and pipelines, and to participate in the oil trading market. It is also reflected in its use of deep-sea oil production knowhow in the North Sea and Gulf of Mexico—former

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turfs of major oil companies (Villela, 1983; Wells, 1988). The emergence of Brazilian manufacturing MNCs As mentioned, outward FDI by Brazilian manufacturing companies in the emergent phase was rather limited. International production by the earliest Brazilian manufacturing MNCs in bicycles (Calói), electrical products (Gradiente Electronics) and motor vehicle parts (Eluma and Marcopolo) which consisted mainly of assembly operations was a means to overcome the high degree of protection in export markets. In the mould of the product cycle model of Vernon (1966), both Gradiente and Calói developed some export experience (although never more than 20 per cent of total sales according to Wells, 1988) with a network of dealers and service centres when the firms established assembly operations in Mexico and in the Andean Pact countries, respectively. The assembly operations in Bolivia and Colombia by Calói (the leading Brazilian firm in bicycles for leisure) and Eluma (the leading Brazilian firm in copper products and a major car parts manufacturer) circumvented the prohibition on imports stipulated in the Andean Pact regulation by local production with a high domestic value added (no less than 64 per cent of the value of a product).1 Although similar protectionist tendencies in Mexico prompted the assembly of audio/stereo equipment in that country by Gradiente Electronics (Brazil’s largest manufacturer of sound equipment), the assembly plant imported parts and components from the parent company’s factory at the Manaus Free Trade Zone in Brazil. An attempt to encourage greater local value added in Mexico met with limited success as the assembly plant closed down in 1986 (Peres Núñez, 1993). The emergence of these pioneering Brazilian manufacturing MNCs can be viewed in the context of the diversified export promotion industrialization phase of Brazil in the period since the mid-1970s. The elaborate system of export promotion established in this phase served to enhance the growth and diversification of exports particularly of manufactures and technical services and to reduce dependency on primary products.2 More importantly, the system also favoured the decision of some domestic firms to become MNCs.3 While the elaborate export promotion system did not provide the basic incentive to export capital to establish foreign production capacity largely because of Brazil’s large foreign debt and the need to conserve foreign exchange, the financial and credit incentives offered under the system added to the broad range of incentives already enjoyed by many manufacturing companies (mainly assembly industries interested in foreign markets) with the establishment of the Free Trade Zone in Manaus in the mid– 1960s. Export incentives in the Free Trade Zone, including the widespread use of drawbacks, exemptions from customs duties on imports of capital goods for industries under installation and capital financing at subsidized rates, stimulated Brazilian manufacturing companies to establish facilities in the Zone, and in the case of Gradiente and Calói to also establish plants in border countries such as Bolivia, Colombia and even Mexico. Typically, Brazilian manufacturing firms that later became MNCs had facilities already located in the Free Trade Zone (Villela, 1983).

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The emergence of Brazilian services MNCs Brazilian companies in the construction and consulting engineering industries established foreign subsidiaries to execute projects in heavy civil construction (building expressways, railways, irrigation dams, hydroelectric plants, hotels and university cities, etc.) in Africa, the Middle East and Latin America. Among the most prominent of these companies were Mendes Junior (which ranks among the world’s largest construction companies in terms of foreign sales), Camargo Correa, Construtora Rabello, Ecisa, Esusa and Sisal. Construction and consulting engineering firms operated frequently together in foreign markets, with the consulting engineering firms often spearheading construction companies in developing countries with imports of machinery and equipment from Brazil. This occurred in many countries of Latin America and Africa, mainly in the construction of highways and dams. There were some 26 Brazilian consulting engineering firms that had overseas activities between 1975 and 1979 with an average annual sales per company of $18.5 million (Villela, 1983). The international forays of almost all Brazilian construction and consulting engineering companies have been initiated in the form of exports of services to Latin America—a move that was partly in response to the country’s export promotion policy and partly by the need to overcome the firms’ vulnerabilities to the vagaries of the domestic market. At the same time, the tax breaks and subsidized credits associated with the elaborate exports promotion system geared to promote exports of capital goods prompted consulting engineering and construction companies to establish foreign subsidiaries to compete for contracts in overseas projects involving telecommunications networks, ports, hydroelectric power stations, dams, highways, etc. Exports and international production became a dual means to expand markets as many of these companies had achieved a size that required a minimum level of demand to use their installed capacity effectively.4 The expansion abroad of Brazilian construction and consulting engineering companies can be attributed to their ability to adapt technologies to the special needs of developing countries. Most of the Brazilian engineering companies active abroad acquired their expertise from previous associations with foreign companies that had come to Brazil to carry out specific jobs such as the design and assembly of hydroelectric plants, nuclear plants, petrochemicals, steel mills, telecommunications systems and so on (Villela, 1983).5 However, the requisite technologies to execute more sophisticated projects involving petrochemical complexes, offshore drilling rigs and ferroalloy plants were acquired through former licensing arrangements (Sercovich, 1984).6 Apart from their technological skills, Brazilian construction and consulting engineering companies have the ability to raise capital (particularly important in winning contracts in non-oil producing developing countries where bids for the execution of jobs were sometimes linked to the concession of credits at competitive interest rates), and have sophisticated management structures to mobilize a large number of workers, to procure from many suppliers across the world, and to complete projects rapidly and efficiently (Villela, 1983).

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The major expansion of Brazilian MNCs since 1975 While Brazilian MNCs emerged in all three major sectors of economic activity, the main thrust of outward FDI undertaken by Brazilian MNCs during the period of their emergence from the late 1960s until 1975 was accounted for by Petrobrás and the construction and consulting engineering companies, as mentioned. The limited amounts of outward FDI in the manufacturing sector were undertaken by the pioneering Brazilian manufacturing MNCs such as Calói (bicycles), Gradiente Electronics (electrical equipment) and Eluma (copper products and motor vehicle parts). By contrast, the second phase of Brazilian MNC growth which pertain to the period since 1975 can be distinguished clearly as the phase of the major emergence of Brazilian MNCs in the manufacturing and banking sectors and, to a lesser extent, the emergence of overseas mineral prospecting activities by Brazilian state and privately owned resource-based companies. The period also described the continued international expansion of Brazilian MNCs in construction and consulting engineering and the emergence of Globo, a Brazilian MNC in TV broadcasting.7 Some examples of Brazilian MNCs that have come into existence are provided in Table 5.1. The emergence of Brazilian MNCs in banking A major trend towards the internationalization of both public and private Brazilian commercial banks had been observed particularly since 1974, and the pace was so rapid that by June 1981 14 public and private Brazilian commercial banks had operations abroad consisting of 190 branches in 48

Table 5.1 Some examples of Brazilian multinational corporations

Companies (by Foreign main industry) activity A. Primary Oil Petrobrás (through Braspetro and Interbras)

Country Year Notes

Oil Iraq exploration

1972 First contract abroad. It discovered the giant oil fields of Majnoor and Nahr Umr Algeria 1974

Oil exploration Oil South exploration Yemen Oil China. exploration India

1982 1983

The emergence and evolution of multinational corporations from Brazil Oil servicesNorway 1984 Joint venture Oil servicesAngola 1985 18 million contract Oil United 1987 Joint venture with exploration States Texaco to work in the Gulf of Mexico Minerals Siderbras

Coal Colombia 1970sJoint venture exploration Companhia de Mineral Africa 1979 Contract. No Pesquisa de prospection subsidiaries Recursos Gold Angola 1984 Contract. No Minerals (CPRM) prospection subsidiaries Paranapanema Gold Guyana 1984 Joint venture prospection B. Manufacturing Food products Copersucar (a Soluble United 1976 Acquired Hills’ cooperative coffee States Brothers Coffee, the formed by about fourth-largest coffee 70 of the largest processing plant in the sugar and coffee USA, for $150 producers) million. The purpose was to vertically integrate into coffee processing and marketing of coffee as well as cocoa and sugar using the Hills’ Brothers brand name. Sold to Nestlé in 1986 after failing to make adequate returns Cotia

Cattle Nigeria ranches and meat packing, cold storage facilities Soft drinks Nigeria factory

late Joint venture. Prompted 1970s by highly protected host country-market

late Joint venture. Prompted 1970s by highly protected host country market. Plant for bottling guaraná (a traditional Brazilian soft drink), of which the

93

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syrup is imported from Brazil Cica

Canned Argentina 1979 foods Cacique Instant coffeeChina 1985 The leading exporter of bottling Brazilian instant coffee invested $0.5 million in a joint venture to move away from exporting unpackaged instant coffee, and to sell most of the bottled coffee to Japan, Australia and other Asian markets Brahma Malt Argentina 1987 Joint venture production Cerval Soya oil and Portugal 1993 Joint investments with Alimentos meal plant other Brazilian groups Investment: $40 million Textiles, clothing and footwear Grendene Plastic shoes Argentina. 1986 Joint ventures with Argentine partner Colombia, Mexico Hering Cotton Argentina 1986 knitwear licensing Shirt factory Spain 1988 To serve a market segment demanding rapid deliveries. 780 workers in 1991 Vacchi Tannery United 1986 Acquired British tannery Kingdom SP Jeans factory Spain 1989 Penetration of market Alpargatas segments with bigger profit margins. Flexibility in meeting clients’ needs. Investment: less than $14 million

Companies Foreign (by main activity industry)

Country Year Notes

The emergence and evolution of multinational corporations from Brazil Textiles, clothing and footwear (continued) Staroup Jeans Portugal 1989 factory Packaging ITAP Food United 1983 packaging States factory (Buffalo, New York) Toga

Paper and cardboard packaging factory Wood and funiture Securit Assembly and showroom

Bergamo

Furniture assembly

Labra

Pencil factory

Duratex (ItauFactory Group)

Bicycles Calói

Bicycle

United States

Add value to product. With Portuguese partner

Production and finishing of products exported from Brazil Project for a plant in Portugal 1988 Bryce Corporation provided 40% of capital

United States

1979 Investment of $0.5 million in a joint venture to bypass furniture dealers and sell directly to customers, taking advantage of Brazilian wood and labour as well as the oil boom and large property investments in Texas. Local competitive pressures forced the firm to close down the operation Colombia before Invested abroad to offset 1980 the contraction of the domestic market which led to firm losses in 1977 and 1979 Investment in response to Andean Pact legislation. Export of components from Brazil Portugal 1985 Acquired pencil factory for $130 million to increase exports to the European Economic Community Germany 1990 Increase value added. (Hanover) Joint investment. 1990 sales: $14 million

Bolivia

1974Joint venture to overcome

95

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96

production

protected market. Local production with a high domestic value added in response to Andean Pact regulation Bicycle Colombia 1978Joint venture to overcome production protected market. Local production with a high domestic value added in response to Andean Pact regulation Licensing Guyana 1980Royalties agreement for bicycles Lifts Villares

Lifts subsidiary Lifts subsidiary Lifts subsidiary

Chile

Colombia. 1978 Uruguay Mexico 1980

Electrical products Gradiente Assembly Mexico Electronics of audio/ stereo equipment

Inepar

1977

1973Investment prompted by highly protected market. Imports parts from the parent company’s factory at the Manaus Free Trade Zone. Closed down in 1986 Laboratory United 1979Acquired the Plessey and Kingdom subsidiary. Garrard, for $2.5 trademark million, The factory in Swindon. UK. was closed down in 1982, and production transferred to Gradiente’s factory at the Manaus Free Trade Zone. The main objective was to become the owner of a world-known trademark and a distribution network in various countries for sound equipment made in Brazil Electrical Chile 1977Investment of $0.4 million control in a joint venture equipment

The emergence and evolution of multinational corporations from Brazil Companies Foreign (by main activity industry) Electrical products (continued) Inbrac

Nansen

Brastemp

Cables Cables

Country Year Notes

Paraguay Ecuador

1978 Joint venture 1985 Joint venture. Total investment in this venture and that in Paraguay: $1.364 million Electricity Colombia 1985 Investment of $0.3 meters million in a joint venture plant to serve as a springboard for Third World country sales Refrigerator Argentina 1990 Acquired 40% of former production Philips affiliate. Joint investment with Whirlpool. Investment: 110 million

Steel products and capital goods Gerdau Steelworks Uruguay

1981 Produces 39,000 tons per year. To sell in protected market Steelworks Canada 1989 Produces 250,000 tons (Ontario) per year Companhia Steel United 1984 The world’s top iron ore Vale do Rio production States producer acquired 25% Doce (Fontana, of the Fontana steel mill (CVRD) California) from Kaiser Corporation for 120 million. Together with Michael Wilkinson who acquired 50% and Kawasaki Steel Corp. of Japan which acquired the remaining 25%, the California Steel Company was formed. The purpose of CVRD in this investment was to cash in on the value added to iron ore at the processing stage

97

Multinational corporations Bardella

Various capital goods

United States

98

1985Acquired 50% of Schuler Inc.—an American offshoot of Germany’s Schuler GmbH for $4 million in order to have a significant local presence in the USA to win contracts to supply capital goods and to provide a service network. Since the acquisition, Schuler Inc. has become the principal supplier of stamping presses to Chrysler Corporation

Motor vehicle parts Eluma Auto partsArgentina, 1968Established foreign joint ventures with Bundy an South American firm that has been Africa its long-term partner in Brazil since the birth of the motor vehicle industry in the 1950s Auto partsColombia 1971As above Venezuela MarcopoloAssembly Venezuela 1971 of bus bodies Assembly Ghana 1974 of bus bodies 1979Joint venture. Prompted by Cotia Auto partsNigeria highly protected host country market Metal Piston United 1989Clients demand technological Leve factory States solutions and ‘just-in-time’ (South inventory management Carolina) system rather than merely supplying parts or components. Investment: $10 million. Sales: $15 million. Plans to establish a piston factory in Europe and a gasket factory in the USA R&D United 1988 centre States (Ann Arbor, Michigan)

Companies (by

Foreign Country Year

Notes

The emergence and evolution of multinational corporations from Brazil main industry)

activity

Motor vehicle parts (continued) SIFCO Shaft United machining States plant

COFAP

Aircraft Embraer

1989

Engine part factory

Portugal 1991

Engine parts

Argentina 1991

Aircraft Egypt assembly

1983

Aircraft United 1985 assembly Kingdom

Other manufacturing Cotia

Banking 14 public and private Brazilian

Nail making factory

Nigeria

1970s

To respond to ‘just-in-time’ operation. Planned second machining plant in 1991 Investment in response to Single Europe. Investment: $150 million Acquired 50% of INDUFREN to eliminate potential competition in MERCOSUR 1181 million contract to build Tucano military training aircrafts for the Egyptian Air Force. Local production necessary $150 million contract to Tucano military training aircrafts in Northern Ireland for the Royal Air Force. Local production necessary

Joint venture. Prompted by highly protected host country market

190 bank 48 between Foreign expansion branches countries 1974 of banks

99

Multinational corporations commercial banks including Banco do Brasil. Banco de Estado de São Paulo and Banco Real

and 1981

100 associated with the growth of Brazil’s industrial exports, and to gain access to international capital markets

Construction services Mendes ConstructionMauritania1974 Construction of a 1120 Junior million highway (606 km) ConstructionUruguay 1980sCompleted a $157.8 million hydroelectric plant ConstructionIraq 1970sSole contractor for the construction of a $1.2 billion, 1,040 kilometre railway, between Baghdad and Akashat; and the construction of a 128.5 kilometre expressway at the cost of $380 million. As of 1981, the company made investments worth $340 million in machinery and equipment Constutora ConstructionAlgeria early A medium-sized Rabello 1970s company that designed, built and expanded the university cities of Constantin and Algiers. It also won a $200 million contract for the construction of an irrigation dam Camargo ConstructionVenezuela 1980sInvolved with two other Correa international firms in the construction of the Gury hydroelectric plant Odebrecht ConstructionPeru. 1970s Ecuador ConstructionPortugal 1988 Acquired a construction firm to enhance its grip of the local market and

The emergence and evolution of multinational corporations from Brazil

Ecisa

Esusa Sisal Veplan

to break into EEC work ConstructionTanzania 1970sA medium-sized company that built a $250 million highway, and a $150 million highway ConstructionIraq 1980sBuilt hotel networks worth $150 million ConstructionAngola 1980sBuilt hotel networks worth $100 million ConstructionChile 1980sInvested $25 million in a joint venture to build a shopping centre Parque Arauco in Santiago

Companies Foreign (by main activity industry) Engineering services Tenenge Some 26 companies

Retail trade Pão de Açúcar

Country

Year Notes

Subsidiary Paraguay 1975 93 projects 22 1975 Average annual sales countries in 79 per company of $18.5 Latin million America. Africa and the Middle East. Supermarket Portugal

Supermarket Angola Supermarket Spain Broadcasting Globo TV Italy broadcasting

1970 Joint venture. It is the leading supermarket chain in Portugal. It was expropriated by the Portuguese government 1973 1975 Franchise 1985 Acquired Telemontecarlo TV station to apply its programming skills to developed countries. After searching the world for an acquisition.

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Telemontecarlo was chosen based on price and expansion prospects Sources: Compiled from information gathered from Peres Núñez (1993) from primary data obtained from Viviane Ventura, A internacionalização das empresas brasileiras, ECLAC/UNDP Regional Project RLA/88/039, Santiago, Chile: ECLAC, 1991; Wells (1988): Villela (1983): and White (1981).

countries (Villela, 1983). Two public banks stand out: Banco do Brasil with 78 foreign branches, and the Banco de Estado de São Paulo, while the Banco Real with 55 foreign branches was by far the largest and most forceful Brazilian private bank abroad. The establishment of an overseas network by Brazilian state-owned and privately owned banks in the developed countries enabled the banks to attract resources from international capital markets, and their expansion in Latin America was allied closely with the rapid growth of Brazilian exports to the region (Guimaraes, 1986). The major expansion of Brazilian manufacturing MNCs Some 121 locally owned manufacturing firms engaged in outward FDI between 1977 and 1982 (calculated from data in Guimaraes, 1986). The investments were, however, highly concentrated: some 58 firms accounted for 98 per cent of Brazilian outward FDI in the manufacturing sector based on authorization certificates issued by the Central Bank in that period, and many of those firms were leaders in their respective industries. Thus, the process of multinationalization of Brazilian manufacturing firms can be analysed in the context of oligopolistic market structures in which the benefits of economies of scale could be further exploited through international production. A sign of the emergent stage of their multinationalization is seen in the fact that over 80 per cent of those 58 locally owned firms invested in only one foreign country between 1977 and 1982 (Guimaraes, 1986), and sales by foreign subsidiaries and licensed production abroad made up less than a tenth of total sales of the companies in the late 1980s (Wells, 1988). Exports thus continues to be the main modality of serving foreign markets by Brazilian manufacturing companies. The quarter-century since 1975 described the emergence of an increasing number of Brazilian manufacturing MNCs that span a broad range of industries to include food products, textiles, clothing and footwear, paper packaging, wood and furniture, bicycles, lifts, electrical products, steel products and capital goods, motor vehicle parts, and aircrafts (see Table 5.1). To overcome the high degree of protection in export markets continued to be an important determinant behind the emergence of Brazilian manufacturing MNCs—at least until 1980. In the period since 1980, however, international production became a tool of firms as active agents to fulfil several objectives: to penetrate the markets or market segments of developed countries as in the

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cases of Cacique (instant coffee), Copersucar (coffee), Gradiente Electronics (stereo equipment), Hering and Alpargatas (clothing), Securit and Duratex (furniture) and Labra (pencils); to have a significant local presence in order to obtain contracts in host country markets as in the cases of Bardella (capital goods), Metal Leve (pistons), SIFCO (shaft machining), COFAP (engine parts), and Embraer (aircrafts); to broaden the geographical scope of their exports as in the case of Nansen (electricity meters); to add value to their product as in the cases of ITAP and Toga (packaging), as well as Cacique (instant coffee); and to integrate in more profitable higher value added activities in foreign markets as in the case of CVRD (steel). The rate of expansion overseas accelerated rapidly in the 1980s, along with the accumulation of large trade surpluses associated with the export drive spurred by government policy after 1984 and the domestic market slowdown after 1982 (Villela, 1983). The emergence and growth of Brazilian MNCs in both resource-based industries and more capital intensive industries is a reflection of Brazil’s large and developed manufacturing sector among developing countries that builds upon its rich agricultural, forestry and mineral resources as well as efforts to expand industrial capacity in capital goods industries. Although there was no specific sequential pattern in the emergence of the different industries that engendered Brazilian manufacturing MNCs, the firms from the more capital intensive industries such as bicycles, electrical equipment and motor vehicle parts, were the pioneering Brazilian manufacturing MNCs in the period before 1975 as mentioned, while firms in the resource-based industries of food, wood products and furniture, paper packaging and textiles, leather and clothing emerged later (see Table 5.2). The next sections explain further the emergence of Brazilian MNCs in the resourcebased and capital intensive manufacturing industries. The expansion of Brazilian manufacturing MNCs in resource-based industries Brazilian manufacturing MNCs came to emerge in such natural resource-based industries as food products, furniture and wood products, paper packaging, and textiles, leather and clothing. Firms in the food products industry showed a consistent pattern of emergence as MNCs since the pioneering steps in international production by Copersucar (the industry leader in sugar and coffee) in 1976 as well as Cica (the leading firm in canned food products) and Cotia (cattle ranches, meat packing, soft drinks) in the late 1970s.8 This was followed by Cacique (the leading firm in instant coffee) in 1985, Brahma (one of two industry leaders in beer brewing) in 1987 and other firms, including Cerval Alimentos in 1993. Firms in the wood products and furniture industry also displayed a consistent pattern of growth starting with Securit (the leading Brazilian firm in office furniture) and Bergamo that became MNCs before 1980. Other firms in the industry followed suit, including Labra (one of two leading firms in pencils production) in 1985 and Duratex (Itau Group) in 1990. On the other hand, firms in the packaging and textiles, leather and clothing industries emerged later than those in the food products and wood products industries. Multinational corporations in the packaging industry such as ITAP and Toga emerged in 1983 and 1988, respectively and firms in the textiles, leather and clothing industries that

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have always been significant exporters were perhaps the latest group of Brazilian firms to internationalize their production activities. Firms in these sectors became MNCs only after the

Table 5.2 The emergence of Brazilian multinational corporations by period and industry

Period to 1975

1976–1980 1981–1985

1986– present

A. Primary Oil exploration Petrobrás (through Braspetro and Interbras Coal exploration Siderbras Minerals exploration Parapanema B. Manufacturing Food Food products products Copersucar Cacique Cica

Food products Brahma Cerval Alimentos

Cotia

Wood and furniture Securit Bergamo Bicycles Calói Lifts Villares

Packaging ITAP Wood and furniture Labra

Textiles, clothing and footwear Grendene Hering Vacchi SP Alpargatas Staroup Packaging Toga Wood and furniture Duratex (Itau group)

The emergence and evolution of multinational corporations from Brazil Electrical products Gradiente Electronics

Electrical products Inepar Inbrac

Electrical products Nansen

Electrical products Brastemp

Steel products and capital goods Gerdau Companhia Vale do Rio Doce (CVRD) Motor vehicle parts Eluma Marcopolo

Period to 1975

Motor vehicle parts Cotia

1976–1980

Motor vehicle parts Metal Leve SIFCO COFAP

1981–1985 1986– present Aircraft Embraer

C. Services

Other manufacturing Cotia Banking 14 public and private Brazilian commercial banks including Banco do Brasil, Banco de Estado de São Paulo and Banco Real

Construction services Mendes Junior Constutora Rabello Odebrecht Ecisa Engineering Engineering services services Tenenge some 26 companies Retail Pão de Acucar

Construction services Camargo Correa Esusa Sisal Veplan

Broadcasting Globo Source: Derived from Table 5.1.

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mid-1980s starting with Grendene (the leading firm in plastic footwear), Hering (the leading firm in cotton knitwear and T-shirts) and Vacchi (a company with a long experience in the exports of leather products to Europe) in 1986, followed by SP Alpargatas and Staroup (both manufacturers of jeans) in 1989 (see Table 5.2). Through international production, Brazilian firms in the clothing and leather industries have been able to exploit profitable higher value added activities and market niches in the developed countries (Peres Núñez, 1993). The competitive advantages of Brazilian MNCs in these resource-based industries had been nurtured in the richness of Brazil’s natural resources. Indeed, primary products formed the basis of Brazilian industrial development between 1800 and 1930 (Gereffi and Evans, 1981). The sustained strengths of Brazil in primary product sectors is a legacy of its primary product export economy industrialization phase in which exports of agricultural produce (particularly coffee)—that provided over 90 per cent of Brazil’s foreign exchange before 1945—was the principal driver of economic growth (Newfarmer, 1980). Indeed, of all primary commodities that Brazil produced and exported to include sugar, cocoa, wood, iron ore and others, coffee became its principal export product and Brazil reigned supreme in the production and export of coffee worldwide. Unlike in other developing countries where foreign capital controlled primary sector production, coffee production in Brazil was dominated by Brazilians (Gereffi and Evans, 1981). The comparative advantage of Brazil in coffee production thus led to the development of competitive advantages of local producers and major exporters in the coffee industry, some of which like Copersucar (a consortium of the leading firms in sugar and coffee production) and Cacique (the leader in instant coffee) became MNCs.9 The key strength brought to bear by these coffee companies in their vertically integrated outward FDI activities is the assurance of a steady and abundant supply of coffee and other primary commodities for which the firms in particular, and Brazil in general, is responsible for a considerable proportion of world output.10 Similarly, Companhia Vale do Rio Doce—the Brazilian leading company in iron ore mining and regarded as the world’s top iron ore producer—secured a foothold in the United States by partly acquiring a steel mill in Fontana, California, in order to profit from the value added to iron ore at the processing stage. The company’s steady supply of low-cost iron ore from Brazil brought to the United States through its own shipping fleets have been instrumental in bringing down the costs of steel produced by the Fontana mill (Wells, 1988). Forward vertical integration in foreign markets, particularly in developed countries, thus became a strong driving force behind the outward FDI of these companies to assure themselves of steady buyers. Their strong advantages based on the control of abundant agricultural or forestry based raw materials or mineral resources enabled their integration into the more advanced stage in the value added chain as an important means to earn higher profits and expand markets (Diaz-Alejandro, 1977). Similar strengths obtained on the basis of abundant raw materials in Brazil are evident among the Brazilian manufacturers in such industries as furniture, pencils, paper and cardboard packaging and textiles, clothing and leather whose origins can be traced to the

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export economy phase that fostered industrialization in a broad range of industries that had low capital and technological barriers to entry. Indeed, among the industries that thrived during the primary product export phase were textiles and foodstuffs (which supplied nearly three-quarters of factory production), paper, glass, cigarettes, soap, matches as well as several foundries that manufactured hardware, agricultural machinery and railway wagons (Newfarmer, 1980). Many of these industries spawned Brazilian MNCs. For example, Securit—the largest office furniture maker in Brazil—opened a showroom and assembly plant in Houston, Texas, in 1980 with the objective of selling directly to the customer while taking advantage of cheap Brazilian wood and labour and capitalizing on the oil boom in Texas and the large Arab real estate investments in the state (Wells, 1988).11 Similarly, the pencils produced at the Portuguese factory of Labra (one of two leading Brazilian companies in pencil production) were sold to European markets at a competitive price on the basis of the company’s access to low-cost wood from Brazilian forests, its large-scale production, licensed technology from Europe and cheap labour in both Portugal and in Brazil (Wells, 1988). The growth of Brazilian firms and MNCs in the textiles industry can be traced to the origins of the domestic textiles industry as one of the oldest and most successful locally controlled Brazilian industry spawned during the primary product export industrialization phase. At the turn of the twentieth century Brazilian textile companies already enjoyed some degree of success despite competition from European and North American imports, and by 1920 Brazilian factories had expanded to a scale comparable to their foreign competitors and met virtually all the local demand for textiles (Stein, 1957). The rapid growth of Brazilian textile companies in this period was attributed partly to their access to relatively inexpensive British textile technology that had become available increasingly with the decline of the comparative advantage of Great Britain in textiles production vis-à-vis the United States and other Europe (Hobsbawn, 1968). The abundant natural resources of Brazil not only helps to explain the emergence of Brazilian manufacturing MNCs in the resource-based industries but also the involvement of Brazilian resource-based companies in foreign mineral prospecting activities. While these activities did not always involve the establishment of subsidiaries (as in the case of the state-owned Companhia de Pesquisa de Recursos Minerais (CPRM) whose mineral prospecting activities in Africa was undertaken through contracts), the accumulated experience of these companies nurtured in the vastness and natural resource abundance of Brazil was applicable directly to their overseas mineral prospecting activities. Gold mining is a particular forte especially for CPRM and the privately owned company, Parapanema. Some of the firms were so advanced in their field as shown, for example, in the case of Metalur that supplied Brazilian equipment to its Norwegian plant producing high-grade magnesium (Wells, 1988). The expansion of Brazilian manufacturing MNCs in capital intensive industries Apart from the resource-based industries, Brazilian manufacturing MNCs came to emerge in more capital intensive industries such as bicycles, lifts, electrical products, steel and capital goods, motor vehicle parts and aircrafts. The electrical products industry

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was one of the first industries to engender Brazilian MNCs starting with the international production by the industry leader in stereo equipment, Gradiente Electronics in 1973 as mentioned, and has since proven to be one of the more important industries of Brazilian FDI. The outward FDI by Gradiente was followed by the other firms in the industry, including smaller- and medium-sized firms such as Inepar (producer of electrical control equipment) and Inbrac (producer of cables and wires) that initiated international production in 1977 and 1978, respectively, and Nansen (producer of electricity meters) and Brastemp (producer of electrical appliances) that initiated international production in 1985 and 1990, respectively. Villares (the leading firm in the production of mechanical lifts) initiated the establishment of foreign subsidiaries in 1977, while firms in the steel products and capital goods industries initiated international production in the first half of the 1980s starting with Gerdau in 1981, Companhia Vale do Rio Doce (the leader in iron ore mining) in 1984, and Bardella in 1985. The Brazilian state firm, Embraer (the leading firm in aircrafts) initiated aircrafts assembly abroad in 1983. Firms in the motor vehicles parts industry, on the other hand, displayed a rather more sporadic pattern of growth. Thus, the pioneering forays into international production by Eluma in 1968 and Marcopolo in 1971 was followed by Cotia in 1979, and then much later by Metal Leve and SIFCO in 1989 and COFAP in 1991 (see Table 5.2). The emergence of strengths by Brazilian firms in these industries not directly related to the presence of abundant natural resources can be explained in the context of the switch in industrialization development policy at the time of the Great Depression. The growth in public debt which became an overwhelming burden in the era of declining coffee prices around the Great Depression led to the realization that a total reliance on exportoriented growth based on primary products was unsustainable.12 The decline in export earnings accompanied by the sharp devaluations of the local currency precipitated a shift in industrial development policy away from growth based on exports towards one based on import substitution industrialization.13 The objective of the new industrial development policy in effect between 1930 and 1955 starting with the horizontal ISI phase was to foster the local production of consumer non-durables (light consumer goods) and the local assembly of consumer durables. This new industrialization strategy was implemented largely through state entrepreneurship in basic industries like steel to ensure domestic manufacturers a steady supply of locally available inputs while at the same time serving to limit foreign control in these strategic industries; the provision of artificial support to coffee prices to ensure the presence of an adequate local demand for manufactured goods; the imposition of pressures on foreign subsidiaries to increase local content; and, perhaps most important of all, the raising of tariff barriers against manufactured goods (Gereffi and Evans, 1981).14 The latter led to the adoption of a fivetiered import licensing system with machinery and raw materials given preference (Bergsman, 1970). Although the horizontal ISI phase did not become the dominant industrial development strategy until 1930, the seeds that enabled this strategy to flourish eventually had been planted in the primary product export industrialization phase in two important ways: first, as previously mentioned, the export economy fostered some industrialization in industries

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that had low capital and technological barriers to entry. Although most of the industries that thrived in the primary product export economy phase produced non-durable consumer goods such as textiles and foodstuffs, paper, glass, cigarettes, soap and matches, there were also several noteworthy foundries that manufactured hardware, agricultural machinery and railway wagons (Newfarmer, 1980). Second, local capital in the primary export sector, particularly from coffee, played a strong role in the emergence of consumer goods industries that were the focus of horizontal ISI. Indeed, most industrial capital originated with planters or merchants who viewed industry as complementary to their activities (Newfarmer, 1980). The planters either provided the liquid capital from their coffee sales, which in combination with the government subsidies to the coffee industry financed the development of new importcompeting industrial enterprises, or the planters themselves moved into complementary industries such as sugar mills and textile factories that processed the crops they cultivated. The important roles of planters as well as merchants that also moved into industry in sectors in which protection could be derived from tariffs or had high international transport costs meant that industrial production in Brazil fell less than 10 per cent in the early depression years and by 1933 had regained its 1929 levels (Baer, 1965). In addition, there was even the renationalization of some local manufacturing industries as shown by the acquisition during the Depression of the Votorantim rayon mill from the British by a local group of companies—the Ermirio de Moraes group (Gereffi and Evans, 1981). This manifested the growing accumulation of strengths by local textile manufacturers which was already in evidence during the turn of the twentieth century when these manufacturers became capable of replacing British imports, as mentioned. In order of economic importance, the state, private Brazilian firms and foreign firms participated in the horizontal ISI process (Cardoso, 1973). With the strong role of local capital and the development of locally controlled firms and industries, the period of horizontal ISI was consistent with a period of diminished dependency for Brazil (Gereffi and Evans, 1981).15 By the mid-1950s, horizontal ISI was superseded by a phase of vertical ISI in which the emphasis was on internalizing all phases in the manufacture of consumer goods (both non-durables and durables) and integrating backwards into the domestic production of intermediate products and capital goods that were causing a significant drain on the balance of payments. The investments required greater technological sophistication and capital intensity which made foreign based MNCs rather than local firms the main instrument of industrial development. The role of foreign investment in providing capital and technologies in the industrialization process in both the basic industries and the leading industrial sectors meant that Brazil had taken on an associated-dependent pattern of development (Cardoso, 1973).16 The inability of local capital to penetrate the technologically sophisticated and capital intensive industries combined with a military regime that supported the interests and modes of organization of international capitalism led Evans (1976) and Cardoso and Falleto (1979) to describe the vertical ISI phase of Brazil as the internalization of imperialism and the internationalization of the internal market, respectively. Thus, unlike in the horizontal ISI phase, dependent development became re-established as the dominant mode of economic growth in the vertical ISI phase

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(Gereffi and Evans, 1981).17 In the midst of the dependent pattern of development, the industrial strengths of the local bourgeoisie in a number of consumer goods industries and in some state-controlled basic industries producing steel as well as machinery, machine tools and other mechanical engineering sectors was increasing rapidly. To explain the growth of Brazilian manufacturing MNCs in capital intensive industries is essentially to explain the growth of Brazilian manufacturing firms in two major groups of industries: the metalworking and mechanical engineering (or non-electrical machinery) industries and the electrical equipment industry. THE GROWTH OF BRAZILIAN FIRMS AND MNCs IN THE METALWORKING AND MECHANICAL ENGINEERING (OR NONELECTRICAL MACHINERY) INDUSTRIES As mentioned, the origins of Brazilian firms in this sector can be traced to the several foundries that manufactured hardware, agricultural machinery and railway wagons during the primary product economy phase. In particular, the entry of Brazilian industrialists in mechanical engineering or non-electrical machinery industries where technological barriers to entry were relatively low and profits were relatively high can be traced to the period after the First World War. The ‘brilliant mechanics’ had captured an important share of the domestic market by 1920 and accounted for approximately 61 per cent of all Brazilian capital goods by 1947–49 (Leff, 1968). The protection accorded to the metalworking and mechanical engineering industries in the large domestic market of Brazil during the period of vertical ISI (1955–1970) induced industrial development by enabling some firms to attain the scale economies of international plants, to approach rapidly the fairly stable technological frontier in their industrial fields, and to increase their exports of goods and industrial technology significantly.18 This was the case particularly of such firms as Romi and Metal Leve, the producers of conventional lathes and pistons, respectively (Katz, 1984) and also of other Brazilian firms in steel production (Gerdau) and in the mechanical engineering industries such as bicycles (Calói), lifts (Villares), motor vehicle parts (Eluma, Marcopolo, SIFCO, COFAP), equipment for paper production (Pilao), capital goods (Bardella) and aircrafts (Embraer) that eventually became MNCs. The growth of locally controlled firms in the motor vehicle parts industry that later became MNCs is of particular interest. Indeed, it was the existence of some 250 locally owned firms producing 8,000 motor vehicle parts in the early 1950s that gave government policy makers the impression that Brazil could benefit from the high linkage potential of the foreign-controlled motor vehicle industry of Brazil (Shapiro, 1994). In principle, the motor vehicle industry could serve as the hub of an integrated industrial structure by triggering the domestic production and technological advancement of suppliers of parts and components, as well as those firms in the more complementary basic industries of steel, glass, rubber and plastics in part through the provision of finance, training and technical assistance by the foreign car producers (Dahlman, 1984). However, the extent to which this happened was limited as the motor vehicle parts

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industry in time became dominated by foreign firms as a result of the superior market power of the foreign MNCs which enabled them to control their supply channels either through the vertical integration of car manufacturers or through inward FDI by foreign supplier companies. A bifurcated parts sector emerged in which foreign firms predominated in large, capital and technology intensive operations producing parts in a mainly concentrated market and sold most of their output to the terminal sector (car manufacturers). Brazilian firms, on the other hand, were relegated mainly to small- and medium-sized operations that produced standardized parts in a more competitive market and which sold a greater portion of their output as replacement parts (Shapiro, 1994). Despite the market control exercised by the foreign based MNCs in both the motor vehicle and motor vehicle parts industries, some locally owned firms in motor vehicle parts continued to flourish as reflected in the growth of their exports and outward FDI. The recent impetus for their international production has been provided by the rapid changes over the last ten years in the organizational and technical structure of their user industries particularly in the United States and Europe. Thus, in response to the demand of their clients for suppliers that do not merely provide parts or components but also assist in the development of designs, offer technological solutions and fit in with their just-in-time inventory management systems, Brazilian motor vehicle part makers such as Metal Leve and COFAP as well as the capital goods maker Bardella established foreign plants to be closer to their user industries in the developed countries (ECLAC, 1992). The emergence of Embraer—a Brazilian mixed state—private firm and an MNC in the aircrafts industry—also stirs particular interest. Indeed, to describe the development of Embraer is to describe the development of indigenous technological capacity in the Brazilian aircrafts industry and the desire to achieve local control over this strategic industry (Dahlman, 1984). The creation of Embraer stemmed from the need to have a monopolist in the domestic aircraft industry in which scale economies are only achievable at very large volumes of output and which required intense technological effort. The eventual success of Embraer was reflected in its ability to produce a broad range of different airplane models for military and commercial uses with a high percentage of domestic content, and to export these to both developed and developing countries.19 Its development as an MNC was prompted by the need for a local presence in foreign markets in order to obtain contracts to build military training aircrafts for the national Air Force. This explains the firm’s establishment of aircraft assembly operations in Cairo and Belfast (Wells, 1988). THE GROWTH OF BRAZILIAN MNCs IN THE ELECTRICAL EQUIPMENT INDUSTRY Although MNCs in the electrical equipment industry were among the pioneering MNCs in manufacturing along with those in the bicycles and motor vehicle parts industries, the origins of Brazilian firms in the electrical machinery industry have a more recent vintage compared to those of the metalworking and mechanical engineering industries. Indeed, the origins of Brazilian producers of electrical products can be traced only after the Depression (coinciding with the onset of the horizontal ISI phase), despite the rapid

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growth of electrical generating capacity and the final demand for electrical goods in the period prior to the Depression (Newfarmer, 1980).20 The effective barriers to imports of consumer products imposed as a result of the scarcity of foreign exchange during the Depression created a fortuitous environment for the entry of domestic firms into production relatively free of competition (at least until 1955 when foreign based MNCs began to manufacture appreciable quantities of electrical machinery in Brazil). The entry of domestic firms was, however, not in heavy electrical machinery, where high technological barriers impeded their entry into production, but was rather confined to a segment of the industry that had relatively low technological barriers to entry. Thus, most of the domestic entrants had undertaken the assembly production of electrical wire, small parts and light electrical appliances such as radios, television sets and other small appliances, and eventually their products were rapidly replacing imports in these product lines. Technologies for production of these simple consumer electrical products were acquired either through purchases from firms in the developed countries which could not reach the Brazilian market with the onset of horizontal ISI after the Depression, or through reverse engineering by which Brazilian firms copied the design of products previously imported. The significant growth of local participation in the electrical equipment industry (or a segment of it) between 1930 and 1955 led to above average growth rates for the industry as a whole. The developments since the onset of the period of vertical ISI had negative repercussions on the growth of Brazilian electrical producers. First, the implementation of SUMOC Instruction 113 in January 1955 which granted foreign MNCs cheap access to foreign machinery favoured the entry of foreign MNCs that sustained industrial growth at the expense of denationalization.21 Thus, some two-thirds of the Brazilian electrical industry was in the hands of foreign MNCs by 1961 when SUMOC Instruction 113 expired, and this share grew further to over 75 per cent by 1974 (Newfarmer, 1980). The denationalization owed partly to the takeovers or mergers of many Brazilian firms with foreign MNCs. Those firms that were not acquired or merged with foreign companies were either compelled to associate with the foreign MNCs to secure favourable import terms or to seek foreign licences from the United States to keep abreast of latest technologies. Thus, Brazilian firms came to produce such electrical appliances as Emerson, Kelvinator, Westinghouse and Whirlpool under licences.22 Second, the dominance of foreign MNCs in the electrical equipment industry, particularly in the heavy electrical equipment sector, and the behaviour of these firms to maintain market control, both weakened price competition and erected a further barrier to entry to domestically owned firms quite apart from the high technological requirements of this segment of the industry.23 It meant that Brazilian firms remained confined to positions of high technological dependency or marginal suppliers in their own domestic market. This historical review of the origins of Brazilian firms in the electrical equipment industry helps to shed light on the emergence of Brazilian MNCs in this industry to include Gradiente Electronics (the leader in stereo equipment), Inepar (electrical control equipment), Inbrac (cables and wires), Nansen (electricity meters) and Brastemp (refrigerators). It also helps to explain why Brazil had not spawned firms or MNCs in the more dynamic segments of the electrical equipment industry.

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Conclusion This chapter analysed the emergence and evolution of Brazilian MNCs over the last 30 years. It examined the main determinants of outward FDI and their industrial and geographical patterns in two distinct time phases: the period of emergence from the late 1960s to 1975, and the period of development in the period since 1975. Although the pioneering Brazilian MNCs spanned the three sectors of economic activity, the main thrust of outward FDI by Brazilian MNCs had been in services by construction and consulting engineering companies. Unlike American MNCs that emerged in a major way in outward FDI in the primary sector to exploit firm-specific assets in resource extraction and processing nurtured in the natural resource abundancy of the United States, the security of the supply of raw materials or natural resources as a motive for outward FDI in the emergent phase of Brazilian MNCs was rather unique to the Brazilian state-owned company, Petrobrás, and specific to one natural resource—oil—given Brazil’s rich agricultural and mineral resources. The only other exception of Brazilian resource-based FDI was the joint venture established with the Colombian government by the Brazilian state steel enterprise, Siderbras, to exploit coal in Colombia with the objective of gaining independence from the United States for such raw material (White, 1981). In this respect, the Brazilian MNCs share more common features with Swedish MNCs where firms in the industries of mining, metal production and forestry became MNCs only to a very limited extent (see Chapter 4). Outward FDI by Brazilian manufacturing companies in the emergent phase was also rather limited. International production by the earliest Brazilian manufacturing MNCs in bicycles (Calói), electrical products (Gradiente Electronics) and motor vehicle parts (Eluma and Marcopolo) which consisted mainly of assembly operations was a means to overcome the high degree of protection in export markets. The period since 1975 described the major expansion of Brazilian MNCs particularly in manufacturing and banking. The establishment of an overseas network by Brazilian state-owned and privately owned banks in the developed countries enabled the banks to attract resources from international capital markets, and their expansion in Latin America was allied closely with the rapid growth of Brazilian exports to the region (Guimaraes, 1986). The period also witnessed the emergence of Brazilian manufacturing MNCs in a major way, many of which were accounted for by leading firms in their respective industries. In many respects, the extent of the multinationality of these firms remains emergent as reflected in the small share of sales by foreign subsidiaries and licensed production abroad in the total sales of the companies and the continuing importance of exports as the main modality of serving foreign markets. The quarter-century since 1975 described the emergence of an increasing number of Brazilian manufacturing MNCs that span a broad range of industries to include food products, textiles, clothing and footwear, paper packaging, wood and furniture, bicycles, lifts, electrical products, steel products and capital goods, motor vehicle parts, and aircrafts. To overcome the high degree of protection in export markets continued to be an

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important determinant behind the emergence of Brazilian manufacturing MNCs—at least until 1980. In the period since 1980, however, international production became a tool of firms as active agents to fulfil several objectives: to penetrate the markets or market segments of developed countries as in the cases of Cacique (instant coffee), Copersucar (coffee), Gradiente Electronics (stereo equipment), Hering and Alpargatas (clothing), Securit and Duratex (furniture) and Labra (pencils); to have a significant local presence in order to obtain contracts in host country markets as in the cases of Bardella (capital goods), Metal Leve (pistons), SIFCO (shaft machining), COFAP (engine parts), and Embraer (aircrafts); to broaden the geographical scope of their exports as in the case of Nansen (electricity meters); to add value to their product as in the cases of ITAP and Toga (packaging), as well as Cacique (instant coffee); and to integrate in more profitable higher value added activities in foreign markets as in the case of CVRD (steel). The emergence and growth of Brazilian MNCs in both resource-based industries and more capital intensive industries is a reflection of Brazil’s large and developed manufacturing sector among developing countries that builds upon its rich agricultural, forestry and mineral resources as well as efforts to expand industrial capacity in capital goods industries during the primary product economy industrialization phase and import substitution industrialization phase of the Brazilian economy.

Notes 1 The investments by Calói in Bolivia were particularly favoured when a Bolivian firm supported by the government began to look for foreign partners for the domestic production of bicycles in response to the prospects of high profits from protection (White, 1981). 2 As a result of the aggressive system of export promotion, Brazilian industrial exports increased in real terms by 2.7 times between 1975 and 1980, a rate of growth much faster than that of total exports which grew in real terms by 1.7 times over the same period (Villela, 1983). 3 The Brazilian system of export promotion contributed greatly to the decision of Brazilian firms to become MNCs. The system consisted of a large number of financial and credit incentives, of which the most important in stimulating outward FDI were the financing of exports of capital and durable goods, the financing of sales of services abroad (including the purchase in Brazil of machinery, equipment, vehicles, instruments, etc. for the execution of construction jobs overseas), the financing of the establishment of enterprises abroad by manufacturing and exporting companies for a period of up to three years, and lines of credit (some 53 of them) to facilitate the purchase of goods and services in Brazil. Interest rates charged on all the above described credits were highly subsidized (Villela, 1983). 4 An indication of the high degree of reliance on foreign markets is seen in Mendes Junior (one of the largest privately owned Brazilian construction firms) that earned more than a third of its revenues abroad in the mid-1980s (Wells, 1988). 5 For example, Engevix—a leading Brazilian consulting engineering firm—designed

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part of the underground transportation system of Baghdad using expertise gained when it helped plan the São Paulo Metro handled by the Soferail company (France) in the late 1970s. The firm absorbed the technology and adapted it to Iraq (Wells, 1988). 6 Such is the case, for example, with Tenenge—an industrial engineering firm with subsidiaries in Chile and Paraguay—that can deliver state-of-the-art refineries through composite technologies developed by the firm from the fusion of imported technologies obtained through former licensing agreements and its own technology (Wells, 1988). 7 An indication of the continuing international expansion of construction and consulting engineering firms since the period of their emergence was seen in the growing number of firms engaged in outward FDI. For example, some 31 of these companies were involved in outward FDI between 1977 to 1982. The investments, however, were highly concentrated with the three largest firms accounting for 68 per cent of the total investment, and 19 firms for 99 per cent of the total investment (Guimaraes, 1986). 8 Cotia Comércio Exportação e Importação is a trading company founded by the Paulo Brito group—a family company owning cattle ranches and cold storage facilities for meat in São Paulo (Villela, 1983). 9 In 1976, Copersucar acquired Hills’ Brothers Coffee, the fourth-largest processor of coffee in the United States in order to integrate vertically into coffee processing as well as the marketing of coffee, cocoa and sugar in the United States through an established brand name. However, the need for a marketing outlet for sugar disappeared unexpectedly as Brazil’s energy programme generated a rapid growth in demand for sugar to be made into alcohol for fuel (Wells, 1983). On the other hand, Cacique—the leading exporter of Brazilian instant coffee—entered into a joint venture with a Chinese state farm to bottle coffee starting in 1987. The company’s aim was to progress beyond exporting unpackaged instant coffee and to sell most of the bottled coffee to Japan, Australia and other Asian markets (Wells, 1988). 10 This strength does not necessarily guarantee success, as shown by the outward FDI of Copersucar in the processing of coffee and the marketing of coffee, cocoa and sugar in the United States which failed to make adequate returns and led the company to sell out to Nestlé in 1986 (see Wells, 1988). 11 However, pressure from local competition forced Securit to close down this foreign operation (Wells, 1988). 12 The massive public debt incurred in the process of improving urban infrastructure became an overwhelming burden as public debt service soared to 43 per cent of export earnings in 1932–33 (Baklanoff, 1971). 13 It was the conviction of Getúlio Vargas to abandon Brazil’s agricultural vocation and thus to pursue policies supporting ISI (Gereffi and Evans, 1981). 14 Symbolic of the state investment in basic industry was the formation of the huge Volta Redonda steel complex (Cardoso, 1973). 15 However, although local capital may have played a leading role in the shift from primary product export phase to the horizontal ISI phase during the Great Depression, inward FDI also assisted in the transition process. This is shown in

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particular in the growth of FDI in the manufacturing sector in Brazil during the period. Indeed, almost one quarter of American FDI in Brazil in 1929 was in manufacturing (Gereffi and Evans, 1981). 16 Evidence of the role of foreign capital and technologies in the development of even basic industry is seen in the steel industry. Usiminas, one of the three large stateowned integrated steel mills in Brazil, initially obtained the technology necessary for steel production through a Japanese joint venture in the early 1960s (Dahlman, 1984). 17 The dependent development arose largely from the absence of a strong industrial class whose interests were distinct from agricultural and commerce, and the political supremacy of an export-oriented oligarchy that precluded a more nationalist government policy that allowed for the indigenous development of national industry in the more sophisticated products, but instead left the door open to foreign goods (or foreign firms) (Newfarmer, 1980). Thus, instead of changing their comparative advantage systematically in more dynamic industries, Brazilian producers chose to maintain comparative advantages in coffee and consumer non-durables of low technology and capital intensity, while allowing imports or foreign MNCs to dominate the rapidly growing industrial sectors. The cycle of cumulative decline became self-perpetuating as the market power exercised by foreign MNCs over the supply of products, production technology, international finance, etc. further precluded the emergence of strong indigenous firms that could effectively compete. 18 Up to 70 per cent of the output of the capital goods industry was exported in 1984 (Wells, 1988). In addition, some 27 of the 58 Brazilian manufacturing firms that accounted for 69 of the 112 overseas operations involving exports of industrial technology between 1976 and 1981 were capital goods manufacturers. Capital goods manufacturers provided the dominant source of industrial technology exports in such industries as machinery, equipment and components, sugar and alcohol and paper and pulp (Sercovich, 1983). 19 Owing to its policy to increase the participation of local firms in the manufacture of airplanes, Embraer encouraged the development of the local aircraft parts industry that became important exporters in their own right (Dahlman, 1984). 20 This is not to say that Brazilian industrialists in the electrical equipment sector never came to existence in the period before the Depression. The firm, Guinle and Gaffree, that owned one of the largest Brazilian enterprises of the early twentieth century—the docks at Santos—established a substantial system of public utility companies dominating such major cities as Salvador, Bahia and Port Alegre and Rio Grande do Sul but these were eventually sold in the late 1920s to The Electric Bond and Share Company (a finance subsidiary of the United States-based General Electric Company). The sale was owing largely to the inability of Guinle and Gaffree to raise sufficient capital from the North American capital markets to modernize and expand their systems. Thus by 1920, foreign-owned companies either built or acquired most of the electrical generating capacity in Brazil and provided the greatest demand for heavy electrical equipment. Their demands were largely met through imports because until 1920 there were virtually no electrical

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products produced locally despite the creation of a partial and temporary protection to foster the growth of local companies and to encourage the entry of foreign MNCs (Newfarmer, 1980). 21 More than 80 per cent of all foreign direct equity flows entered as machinery imports under Instruction 113 between 1956 and 1960. About 80 per cent of these were invested in plants to produce heavy electrical equipment, refrigerators and compressors, telecommunications equipment, cable and conductors and electronic apparatus (Newfarmer, 1980). 22 It is therefore not surprising to discover that the refrigerator production facility established in 1990 in Argentina by the Brazilian firm, Brastemp, through a part acquisition of a former Philips affiliate represented a joint investment with the American electrical equipment company, Whirlpool, with which it had a long association. 23 The expansion of foreign MNCs in the Brazilian electrical industry was not predicated solely on their superior technical efficiency, but to their market tactics and strategies made possible by their superior market power: interlocking directorships, mutual forbearance, control of supply channels, cross-subsidization and predation, formal and informal collusion, formal political ties, product differentiation and acquisition (Newfarmer, 1980).

6 Conclusion The emergence and evolution of multinational corporations from the resource-abundant countries This part of the book analysed the emergence and evolution of MNCs based in resourceabundant countries by focusing on three countries of different sizes. In particular, it compared the growth of MNCs from resource-abundant large countries such as the United States and Brazil with that of MNCs from an resource-abundant smaller country of Sweden. The main rationale was to determine whether there exists a common pattern in the emergence and evolution of MNCs from resource-abundant countries. The general conclusion that can be drawn is that to some extent there is a common pattern in the emergence and evolution of MNCs from the three resource-abundant countries. The similarities are closest when considering the pattern and growth of their outward FDI in the manufacturing sector and the mining sector (see Table 6.1). Regardless of the size of the countries concerned, the emergence of manufacturing firms and MNCs based in the three resource-abundant countries derive commonly from cumulative strengths in the engineering industry generally comprising metal products, machinery and transportation equipment. The basis of their affinity is the abundance of mineral resources in the three countries which fostered a well-entrenched tradition of industrialization based on metals processing, the technical and metallurgical know-how of which spilled over into related sectors of the engineering industry such as machinery and transport equipment. As has been learned in the individual country case studies, the emergence and expansion of American FDI in manufacturing was linked to the rapid development in the 1850s of American technologies in certain metallurgical industries (i.e. machine tools, guns, reapers, and sewing machines) linked with mass production in which the United States had already acquired world leadership (Wilkins, 1970). Many American companies in the metallurgical industries sought export markets to dispose of surplus output and obtain economies of scale, and fulfilled a pioneering role in international production prior to the American Civil War. Similarly, the growth of the Swedish engineering industry was an outcome of the Swedish industrialization phase between 1870 and the First World War that built upon cumulative strengths in iron and steel production based on indigenously abundant

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Table 6.1 Resource-abundant countries: variations in the early stages of outward direct investment across different countries

Examples Dominant form of earliest of outward FDI countries United States

Type of locally bas based MNC

The installation of mercantile houses Colonial overseas as well as the foreign merchants branches of American merchants in the late seventeenth century and eighteenth century The ventures overseas of American Banks and private banks which had their genesis financial in trading companies institutions Railroads construction in the late Railroad nineteenth century in Mexico, Canada companies and the Caribbean. The investments horizontally were regarded as the international integrating extension of the domestic business Agricultural and plans of the railroad companies and a mineral means to assure the efficient transport companies, of minerals and agricultural produce. forwardly integrating Mining investments in the late Mining and nineteenth century attracted by the manufacturing business opportunities posed by the firms presence of rich mineral resources and the lower costs of minerals prospecting and development in Mexico, Canada and South America, as well as the need to supplement domestic mineral resources Sales and manufacturing investments Manufacturing in the late nineteenth century in firms, forwardly Canada, Europe and Japan. integrating or International production motivated by horizontally the need to protect the firm from integrating unfair local competition, the opportunity to earn higher profits, to save on the costs of transportation, warehousing and domestic production and to overcome trade barriers Sales subsidiaries in petroleum and, in Petroleum firms a few cases, in petroleum refining and

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exploration in the late nineteenth century in Europe, Asia, Mexico and South America. Foreign refining motivated by high import duties on refined oil in export markets and to overcome local competition. Foreign exploration motivated by the need to supplement American oil supplies Agricultural investments in the late nineteenth century in the Caribbean (Cuba and the West Indies), Canada and Mexico. American FDI motivated by the richness of foreign natural resources located in close proximity to the United States. The establishment of agricultural estates was supported by investments in transportation by steamship or railroads

Examples Dominant form of earliest of outward FDI countries Sweden

Brazil

Commodity traders, backwardly integrating Agricultural firms Manufacturing firms, backwardly integrating (rarely)

Type of locally based MNC

Establishment of sales subsidiaries Manufacturing firms, to sell the products of the forwardly integrating engineering industry consisting of metal manufactures, machinery and transport equipment Establishment of production Manufacturing firms, subsidiaries to produce for the host backwardly or country market the products of the horizontally engineering industry consisting of integrating metal manufactures, machinery and transport equipment To a limited extent, backward Resource-based vertical integration in resource firms (mainly extraction in resource-rich forestry firms), countries backwardly integrating Manufacturing firms, backwardly integrating. Oil exploration and drilling State-owned firm. activities. International production Manufacturing firms, in bicycles, electrical equipment typically exporting

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and motor vehicle parts Investments in civil construction and consulting engineering

firms. Construction and consulting engineering firms Source: Author’s compilation based on the analysis contained in the country chapters.

sources of high quality iron ore. In combination with other country-specific advantages to include major investments in technological education and training, the large degree of trade orientation and the close personal contacts within the Swedish industrial establishment, there was the rapid absorption and adaptation of technological innovations and their application in modern industrial production in the engineering industry. Technologically innovative engineering firms exported at an early stage of their firms’ history and became MNCs rapidly to enable a celeritous establishment in foreign markets. Finally, the origins of Brazilian firms and MNCs in the metalworking and mechanical engineering industries can be traced to the primary product export economy industrialization phase of the Brazilian economy between 1800 and 1930 that fostered some industrialization in sectors that had low capital and technological barriers to entry, among which were several noteworthy foundries that manufactured hardware, agricultural machinery and railway wagons (Newfarmer, 1980). The ‘brilliant mechanics’ of Brazil had captured an important share of the domestic market by 1920, accounted for approximately 61 per cent of all Brazilian capital goods by 1947–49 (Leff, 1968) and eventually became MNCs in such diverse industries as bicycles, lifts, steel products and capital goods, motor vehicle parts and aircrafts. Apart from the common emergence of manufacturing MNCs based in the engineering industry broadly defined, the process of international expansion of firms in this industry has been fairly common, despite the seemingly disparate attempts to model such process in the case of American metallurgical companies and Swedish engineering companies by Wilkins (1970) and Johanson and Wiedersheim-Paul (1975), respectively. Four stages were described by Wilkins (1970). In the first stage, the American concern sold abroad through independent agents (through an export person or export or commission houses in New York City) or on occasion filled orders directly from abroad. In general, companies started to export using the facilities of international trading firms. In the second stage, the company appointed a salaried export manager, an existing export agency and its contacts, or independent agencies in foreign countries to represent the company. In the third stage, the company either installed one or more salaried representatives, or a sales branch, or a distribution subsidiary abroad, or it purchased a formerly independent agent located in a foreign country. At this point, for the first time, the company made a foreign investment. In the fourth stage, a finishing, assembly or manufacturing plant might be established to meet the needs of a foreign market. Such incremental process of establishment in foreign markets by American metallurgical firms based in a large domestic market has many common elements with the concept of an ‘establishment chain’ proposed by Johanson and Wiedersheim-Paul

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(1975) in describing the gradual process of penetration in foreign markets of Swedish engineering firms based in a much smaller domestic market. Thus, after mechanizing and specializing in a technically advanced product, firms secured the home base and engaged in exports to achieve scale economies; this was associated with the use of a network of agents or representatives (or travelling salesmen) employed by the firms and then by the establishment of a sales subsidiary abroad; and, finally, by the initiation of international production. Despite the broad analogy in the process of international expansion of American and Swedish firms in the manufacturing sector, two main factors differentiate the American and Swedish models. Firstly, the first stage described in the American model of exports being handled by independent agents or international trading firms was often bypassed in the Swedish case. This was because, unlike their counterparts in the staple raw materialsbased industries, the high-quality Swedish steel mills and the new industrial Swedish companies based on mechanical engineering had to establish direct contacts with foreign markets by employing company-appointed representatives or agents or travelling salesmen (Hörnell and Vahlne, 1986) owing to increased product differentiation (e.g. production of special steel versus ordinary steel), and the necessity to have intimate knowledge of market developments and to adapt products to customers’ particular needs (Carlson, 1977). Secondly, by comparison to the United States that is another resourcerich country of a larger size, Sweden—as with all small countries in general—has had earlier forays into international markets through exports (Swedenborg, 1979) associated with their offensive and aggressive strategy to overcome the limited size of its domestic market. Another common pattern in the growth of MNCs from the three resource-abundant countries lies in the importance of the mining sector, once again a feature of the presence of rich and abundant mineral resources in the three countries which enabled American, Swedish and Brazilian firms to develop management and organizational skills and technologies in mineral resource extraction and processing which were exploited profitably abroad. Indeed, mineral extraction and processing featured at some stage in the history of the growth of MNCs based in the three resource-abundant countries; however, this type of investment assumed the highest prominence in the case of the United States and one that emerged at an early stage of development of American MNCs. Although the mining sector accounted for the second largest share of American FDI until the late nineteenth century after railroads, the large capital requirements of mining prospecting and development enabled the mining and smelting sector to become the most important sector of American FDI between the late nineteenth century and 1929. The main purpose of these mining investments by American firms was to profit from the attractive business opportunities arising from the rich and undeveloped mineral resources of Mexico, Canada and South America and to supplement the domestic mineral resources of the United States. By contrast, Swedish firms in the mining sector became MNCs only to a very limited extent. Thus, a striking difference between Sweden and the larger sized but also resourcerich United States was in the relative importance of outward FDI to exploit foreign raw materials. This is explained in the context of the development of competitive advantages

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by Swedish industry in the extraction and processing of domestically available raw materials in a small country in relation to the large scale in which most investment in raw materials is typically undertaken (Swedenborg, 1979). Apart from the Swedish mining firm, Gränges, that operated foreign mines since the 1950s, and notably the LAMCO mine in Liberia, Boliden is one of the few other major firms in the mining and steel industries that invested in major foreign operations in the 1980s (Sölvell et al., 1991). In broad similarity to Sweden, Brazilian firms in the mining sector became MNCs only to a very limited extent and although their emergence can be traced to the 1970s, their major growth took place in the 1980s. While their overseas activities in mineral prospecting did not always involve the establishment of subsidiaries (as in the case of the state-owned Companhia Pesquisa de Recursos Minerais (CPRM) whose mineral prospecting activities in Africa was undertaken through contracts), the accumulated experience of Brazilian companies nurtured within the vast and resource-abundant environment of Brazil was directly applicable to their overseas mineral prospecting activities. Analysing the pattern of MNC growth of the three resource-abundant countries in sectors other than manufacturing and mining shows some further resemblance even though the resemblance may not be universal to all three countries but to two of them. This is the case when examining outward FDI in the petroleum and forestry industries in particular. While the petroleum industry has assumed greater importance for MNCs from the United States and Brazil, the forestry industry has assumed greater importance for MNCs from Sweden and Brazil. The growth of MNCs in the petroleum industry seems to have featured prominently in the resource-abundant large countries of the United States and Brazil but not in the resource-abundant small country of Sweden. However, despite the common importance of the petroleum industry for American and Brazilian MNCs, the determinants of outward FDI in the industry differed in the two large countries. The emergence and expansion of American FDI in petroleum was linked to the presence of rich and abundant petroleum resources in the United States which enabled American petroleum companies to develop management and organizational skills and technologies in petroleum extraction and processing which were exploited profitably abroad. In sharp contrast, the emergence and expansion of Brazilian FDI in petroleum arose from the necessity to search for new sources of foreign oil in light of Brazil’s position as a major importer of petroleum. Towards that end, Braspetro—a subsidiary of the state-owned oil monopolist Petrobrás—was created in 1972 to fulfil a strategic national interest of securing oil supplies abroad through risk contracts and close relations with OPEC countries. It became responsible for the foreign exploration, production, commerce, transportation and storage of oil and its products, as well as for the execution of technical and administrative services related to these activities (Guimaraes, 1986). Thus, although Braspetro was based in a petroleum scarce country, it drew upon the accumulated experience of its parent company in oil and gas exploration, geophysics and drilling in addition to learning by doing on its own in its various foreign activities. This enabled the firm to build up even more advanced engineering and managerial skills related to petroleum exploration and to progress over time to become its own profit centre and not simply an instrument of

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national policy. Evidence for this was found in its increasing ability to enter into risk investments, to render technical services in the construction and installation of oil rigs, refineries, storage systems and pipelines, to participate in the oil trading market and to use deep-sea oil production know-how in the North Sea and Gulf of Mexico—former turfs of major oil companies (Villela, 1983; Wells, 1988). The growth of MNCs based in the forestry industry seems to be closely similar in the case of both Sweden and Brazil but not the United States. In both Sweden and Brazil that have rich forestry resources, backward vertical integration in resource extraction in resource-rich foreign countries was not a prominent activity of their firms, particularly so in the case of Brazil. In both these countries, the extraction and processing of rich forestry resources in the home country was largely an activity dominated by local firms and undertaken in close proximity to local sources of raw materials and energy. Firms from both these countries experienced growth of international production but these took different forms in each country. In the case of Sweden, the rapid growth in international production of firms based in the forestry or paper and pulp industries took mainly the form of forward vertical integration achieved through the full or partial acquisition of their major foreign customers—a move in response to the entry of the North American pulp and paper firms in Western Europe at the end of the 1950s (Carlson, 1977). The forward integration in foreign markets of largely domestic production oriented Swedish forestry and paper and pulp firms was motivated as much by the profitable exploitation of accumulated know-how and skills in extraction and processing of natural resources (Swedenborg, 1979) as by the need to gain market knowledge and to influence product development in the pulp- and paper-consuming industries (Carlson, 1977). In the early 1970s, the Swedish pulp and paper manufacturers had established more than 40 manufacturing plants abroad, mostly in the United Kingdom and Germany (Sölvell et al., 1991), but there have also been outward FDI to gain access to raw materials in Canada and the United States and the production of pulp based on domestic raw materials in Portugal, Canada and Brazil (Söderström, 1980; Olsson, 1993) to safeguard their future expansion. The further growth of their European investments in the 1970s and 1980s enabled the Swedish pulp and paper companies to build dominant market positions (Sölvell et al., 1991). By contrast, the rapid growth in international production of Brazilian firms based in or with close links to the forestry industry took mainly the form of horizontal integration by manufacturers in foreign markets in such industries as wood products and furniture, pencils, paper and cardboard packaging—a move to support their objective to increase their foreign sales through direct sales and, in some cases, international production, while still taking advantage of an abundant and low-cost supply of wood from Brazilian forests. On the other hand, the foreign stakes of American firms in the forestry industry was geared to seek timber and other forestry-based products in their quest to become more independent of foreign producers as well as to make greater profits. Canada was an important host country for these types of investments by American firms owing to the presence of an abundant supply of inexpensive timber, good water power, relatively cheap labour and the absence of American duties on Canadian newsprint since 1911. The forward integration of these firms towards the secondary processing of extracted natural

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resources in Canada in response to the requirements of host country industrialization policy made lumber and paper and pulp mills account for at least one-third of American FDI in manufacturing in Canada between 1897 and 1914. The inflation in the United States brought on by the war boom led to the further expansion of American FDI in Canadian pulp and paper mills to service the needs of American domestic enterprises that were major users of paper. Beyond the similarity in the pattern of MNC growth in particular industries must be mentioned some of the unique sectors in which any one of the three resource-abundant countries have spawned significant MNC activity that was distinctive and incomparable to the growth of MNCs from the other resource-abundant countries. To take just a few illustrative examples, outward FDI in civil construction and consulting engineering seems to have been a peculiar element of Brazilian MNCs that was unmatched in American and Swedish MNCs. In addition, the early outward FDI in the railroads sector and the metamorphosis or merger of the early mercantile businesses of firms into more diversified and sometimes entirely different enterprises engaged in lines of businesses besides commerce (to include mining, agriculture, industry, transportation and banking) were some of the notable features distinguishing American MNCs from MNCs from Sweden or Brazil. Outward FDI in agriculture was also associated solely with American MNCs particularly during the period of their emergence. Thus, despite the similar importance of the agricultural industry in the history of the domestic industrial development and export pattern of Sweden and Brazil, this sector did not form a significant basis of the outward FDI of Swedish and Brazilian firms. Not only did the industry remain largely in the domain of domestic firms in both these countries, the firms became important international companies through exports but not through outward foreign direct investment. Unlike American MNCs, the search for agricultural produce in foreign countries with high agricultural productivity did not provide a driving force for Swedish and Brazilian MNCs. Going beyond the examination of specific industries of importance to particular resource-abundant countries into a broader examination of the breadth of industries that MNCs from resource-abundant countries have emerged and evolved shows that MNCs from the resource-abundant large countries of the United States and Brazil were involved in a wider breadth of industries by comparison to the MNCs from the resource-abundant small country of Sweden. Considering the manufacturing sector alone, American MNCs have emerged first in metallurgical industries as mentioned, and then evolved in the 1920s in industries that competed on the basis of product differentiation (as in the case of food and drink, textiles and clothing), as well as in industries with distinctive products. American industries with worldwide technological leadership gained from the transfer abroad of techniques in product design and engineering and organization of production (electrical industry, motor vehicle industry, certain metal products, petroleum), as have companies with advanced marketing methods (motor vehicle industry, metal products, petroleum). The kinds of American manufacturing enterprises that invested abroad in later decades resembled closely the investors of earlier years: these were leading firms in their industries in the United States that had advantages in technology, unique products and a long history of international economic orientation (see Table 6.2). The fact that an

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industry was technologically advanced did not ipso facto guarantee large FDI, but it generally meant that leading companies in that industry would in time, after

Table 6.2 Resource-abundant countries: actual development paths for outward direct investment, and their association with local industrialization across different countries

Examples Link between domestic development Type of locally of and the growth of outward FDI based MNC countries United States

Manufacturing Slow growth of domestic demand brought about by the depression between firms 1893 and 1897 led firms with surplus production to turn to foreign markets as an outlet for surplus goods that could not be sold at home. Exports led to the establishment of foreign sales branches and then foreign factories at a later stage. The trend towards domestic mergers at Large the end of the nineteenth century manufacturing associated with the development of firms, typically domestic capital markets and the resource based Sherman Antitrust Act that forebade agreements among independent firms to Agricultural firms restrain trade. Actions by the United States governmentManufacturing such as the duty free status accorded to firms, typically exports of natural resources in their resource based unprocessed or processed state. The rapid development in the 1850s of Large American technologies in certain manufacturing metallurgical industries (i.e. machine firms, typically tools, guns, reapers, and sewing exporting firms machines) linked with mass production in which the United States had already acquired world leadership. The rapid importance of market-oriented Large FDI by American firms in the 1920s was manufacturing associated with relatively new industries.firms, typically The previous importance of exporting firms metallurgical firms gave way in the 1920s to the expansion of firms and industries with trademarked or branded merchandise (such as food and drink,

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textile and clothing), or firms with Small- and distinctive products and techniques in medium sized product design, engineering and suppliers to the organization of production (electrical motor vehicle equipment, motor vehicles, certain metal industry products, petroleum) or advanced marketing methods (motor vehicle industry, metal products, petroleum). International production was prompted by prospects of profitable business opportunities in the host country which could not be fulfilled by exports owing to trade restraints.

Examples Link between domestic development Type of locally of and the growth of outward FDI based MNC countries The parallel expansion of American Utility firms in public utilities in both domestic companies and foreign markets between 1914 and 1929 was favoured by the strong support of the United States government and the growth of ownership advantages of American firms in the form of capital, technology, management and marketing expertise. The kinds of American manufacturing Large enterprises that invested in plants manufacturing abroad since the Second World War firms, typically resembled closely the investors of exporting firms earlier years: these were leading firms in their industries in the United States that had advantages in technology, unique products, and a long history of international economic orientation. Among these were firms in transportation equipment, chemicals, machinery, food products, electrical machinery and primary and fabricated metals. The fact that an industry was technologically advanced did not ipso facto guarantee large FDI, but it generally meant that leading companies in that industry would in time, after finding exports could not continue to

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fill foreign demand, show an interest in extending their business abroad through outward FDI. This enabled the firms to penetrate new overseas markets as well as to maintain their long-established position in foreign countries and to meet rising foreign competition. Further industrial upgrading towards Services firms the services sector in the domestic (primarily banks economy and associated growth of and brokerage exports and outward FDI in services houses, professional services, hotels and tourismrelated services, car rentals, etc.)

Examples Link between domestic development Type of of and the growth of outward FDI locally based countries MNC Sweden

Export earnings from wood and iron Manufacturing products financed the establishment of firms in the new industrial companies of the late engineering eighteenth century. The growth of the industry engineering industry generally consisting of metal manufactures, machinery and transport equipment was an outcome of the industrialization phase between 1870 and the First World War. In this phase, the technical and metallurgical knowhow in metals production based originally on iron and steel production from local sources of high quality iron ore spilled over into the engineering industry. Technologically innovative engineering firms that exported at an early stage of their firms’ history became MNCs rapidly to pursue markets, defend export markets, overcome high transportation costs and establish a local presence Vertical integration in the 1960s and Forestry firms, 1970s to establish production closer to forwardly final markets abroad and exploit integrating accumulated know-how in resource

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extraction and processing in foreign markets, to gain market knowledge and influence product development in the pulp- and paper-consuming industries, and to respond effectively to the entry of North American firms in the pulp and paper industry in Western Europe at the end of the 1950s. The relaxation of foreign exchange Services firms controls in Sweden since 1987 and and individuals controls on investment in financial assets (largely in and property abroad property and finance) The rapid growth of Brazilian exports to Banks the Latin American region and the need to have a presence in the developed countries to attract resources from international capital markets led to the overseas expansion of Brazilian banks particularly between 1974 and the early 1980s

Examples Link between domestic development Type of of and the growth of outward FDI locally based countries MNC Growth of international production in a Manufacturing wide range of industries in the 1980s to firms include resource-based and capital intensive industries associated with the large size and breadth of the Brazilian economy that built upon both its rich agricultural and mineral resources as well as efforts to expand industrial capacity in capital goods sectors. The sustained strengths in primary product-based industries is a legacy of its primary product export economy industrialization phase, while that in capital goods-based industries was a product of the various phases of import substitution industrialization. Overseas mineral prospecting activities Resource-based in the 1980s based on accumulated (mainly experience nurtured in the vastness and minerals) firms resource abundancy of Brazil

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Source: Author’s compilation based on the analysis contained in the country chapters.

finding exports could not continue to fulfil foreign demand, show an interest in extending their investments abroad. The American companies whose entrepreneurs exhibited farsighted leadership grew rapidly and made the most far-ranging investments in foreign countries. These features describe consistently the growth of American MNCs over time, particularly in the manufacturing sector. By comparison, Swedish manufacturing MNCs have had a narrower industrial focus in the engineering industry generally and, to a lesser extent, in the pulp and paper industry. Despite their narrower industrial focus, Swedish firms in these industries were technologically intensive, had distinctive products and a longer history of international economic orientation compared to the United States owing to their small country status. Many Swedish firms have become world leaders in their product niches on the basis of product design, engineering and organization of production and advanced marketing methods. Although Brazilian manufacturing MNCs—like those from the United States and other large countries generally—were also involved in a wide breadth of industries to include food products, textiles, clothing and footwear, paper packaging, wood and furniture, bicycles, lifts, electrical products, steel products and capital goods, motor vehicle parts, and aircrafts (see Table 6.2), these firms did not compete on the same basis as American or Swedish

Table 6.3 Resource-abundant countries: technological accumulation and the national course of outward direct investment

(1) Form of technological competence of leading indigenous firms

Stages of national development (2) (3)

Basic engineering skills, complementary organizational routines and structures

More More sciencesophisticated based advanced engineering engineering, practices, basic organizational scientific structures reflect knowledge, more needs of complex coordination organizational methods Type of Trading, railroads, More advanced Research-related outward direct early resource- and resource-oriented investment and investment market-seeking or marketintegration into FDI services targeted international investments in networks

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manufacturing and services Trading, railroads, More forward resource-based processing of (extractive MNCs resources, or or backward growth of vertical fabricating integration), industries for manufacturing, local markets or construction and exports; growth consulting of services engineering

More sophisticated manufacturing and services systems, international integration of investment

Stage of development United States starting in the late starting in 1929 starting in the seventeenth period since the century Second World War Sweden starting in the late between 1870 starting in the 1800s and 1914 1960s Brazil period from the period since currently still late 1960s to 1975 1975 unreached Source: Author’s compilation based on the analysis contained in the country chapters.

manufacturing MNCs. Although Brazilian manufacturing firms in the metalworking, mechanical engineering and electrical equipment sectors had fairly advanced foundry skills and skills in the organization of production, these firms did not feature prominently in trademarked or branded merchandise widely advertised in Brazil. In fact, as the experiences of some Brazilian MNCs such as Copersucar and Gradiente Electronics showed, some of the outward FDI was geared to penetrate the markets of developed countries by acquiring an established trade name abroad. Neither has any Brazilian industry or firm attained significant worldwide technological leadership (the closest it had achieved was the approach to the world technological frontier where this was fairly stable in some metalworking and mechanical engineering industries) nor developed sophisticated technological advantages and advanced marketing methods. Thus, in relating stages of national development to the form of technological competence of leading indigenous firms, the type of outward FDI and its industrial course over time, MNCs from Brazil are at an intermediate stage of development compared to the more advanced American and Swedish MNCs, despite the similarity in some patterns of their MNC growth (see Table 6.3).

Part III Multinational corporations from the resource-scarce large countries

7 The emergence and evolution of multinational corporations from the United Kingdom Introduction During the era of Pax Britannica that lasted until the 1860s and 1870s, the United Kingdom was the world’s premier industrial nation and the head of an imperial empire that spanned vast territories in developing countries or newly settled primary producing areas (Dunning, 1985). Britain was the seat of the First Industrial Revolution and had technological hegemony. Of the 327 important inventions discovered between 1750 and 1850, Britain was responsible for 38 per cent, France for 24 per cent, Germany for 12 per cent, and the United States for 16 per cent (Streit, 1949). The status of Britain as a world imperial power and the first industrial nation provided the country with the opportunity and the capacity to engage in various forms of international business at an early stage. Exports of portfolio, migratory, merchant and financial capital from the United Kingdom date back to the late sixteenth century (Houston and Dunning, 1976). These early overseas investments which entailed some degree of managerial control were directed mainly towards the primary sector (i.e. mines, plantations, etc.), and services such as railways, utilities, banking, trade and commerce. One of the important consequences of the First Industrial Revolution that started with England was the development of processing industries. As a result, domestic industry demand for new sources of energy, industrial raw materials and minerals was created, and the country became a major consumer of particular commodities and foodstuffs for its increasingly urbanized population with high real incomes.1 As the United Kingdom is a country scarce in natural resources, British factories needed to import raw materials and intermediate products financed by the export of finished manufactured products. Trade became the handmaiden of domestic economic growth, but this was often complemented by an outflow of tangible and intangible assets in the form of capital, technology and management to extract the minerals from abroad and provide the raw materials and foodstuffs for the needs of its domestic industries and consumers. With the development of a highly sophisticated international capital market, some of these assets were transferred abroad through the market in the form of foreign portfolio investments and some were transferred through firms in the form of FDI. Both forms of foreign investment were financed from a balance-of-payments surplus accumulated from the growth of Britain’s industrial exports (Dunning, 1985). Although FDI was often the preferred route over spot-market transactions or long-term contracts to obtain primary products as a means to minimize the risks of supply

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disruptions and price increases and to ensure product quality, the amount of FDI actually undertaken in absolute terms remained very small for most of the nineteenth century and also in relation to other kinds of international capital movements. As the economic activities abroad financed by FDI were complementary with, rather than competitive to, the domestic activities of British MNCs and were directed in large volumes to the Commonwealth countries (Chandler, 1986), the pattern of British FDI that developed was not dissimilar to that of its trade and could be explained by the neoclassical Heckscher— Ohlin theory of comparative advantage. The United Kingdom was one of the pioneering home countries of MNCs, and dominated the process of MNC expansion prior to the Second World War. The country accounted for 46 per cent and 40 per cent of the global stock of direct investment abroad in 1914 and 1938, respectively (Dunning, 1983), and was responsible for the highest number of overseas FDI operations (Wilkins, 1988b). This chapter is devoted to exploring the emergence and evolution of British MNCs, and the changing determinants of British FDI as it affected the sectoral and geographical patterns of British FDI over time. The historical excursion is conducted in three time frames: the period prior to 1914, the inter-war period and the period since the Second World War.

The emergence of British MNCs in the period prior to 1914 There were four types of British enterprises that operated overseas in the period prior to 1914. First and foremost were the free-standing companies (Wilkins, 1986a, 1988a). There were literally thousands of free-standing companies, many more than any other type of British enterprise in the period prior to 1914. These companies which did not undertake any prior production in the United Kingdom before investing abroad were registered in the United Kingdom and floated on the London capital market primarily for the purpose of undertaking business exclusively or mainly abroad (Jones, 1996). The second type consisted of companies that developed and established their business preeminently in Britain and then expanded overseas through FDI, thus extending their existing domestic operations (Jones, 1986a). This type of firm, which was the precursor of the ‘classic’ or modern MNC, started to evolve in the 1860s and 1870s, strongly influenced by the rapid growth of international trade and the technological, organizational and institutional developments of the second half of the nineteenth century. The third type was the migrating multinational (Jones, 1986a). This was a company whose headquarters was based originally in one foreign country, invested in Britain and then evolved to become a British-headquartered MNC over time. Such was the case of Borax Consolidated Ltd (Travis and Cocks, 1984) and British-American Tobacco (BAT) (Jones, 1986a). The fourth variant was that of a firm established abroad with no registration in the United Kingdom but nevertheless attracted both British capital (sometimes in the form of large overseas deposits) and British management, the latter often provided by immigrants or expatriates. This type of firm can be distinguished from a free-standing company by the absence of legal headquarters in the United Kingdom (Wilkins, 1988b). Some overseas-registered companies seem to have been established abroad by British

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trading companies which acted as the centre of an investment portfolio and provided management and finance. These types of firms, which were labelled as ‘investment groups’ by Chapman (1985), typically displayed opportunistic patterns of portfolio diversification in their overseas operations. The foundation of the free-standing companies was based on the profitable exploitation of abundant and relatively cheap capital in Great Britain in lucrative investment opportunities abroad.2 Free-standing firms were the institutional device to maintain control over the capital transferred (Wilkins, 1988b). Although each company had a board of directors in Britain charged with the management of the business overseas, the main business was conducted overseas. The free-standing companies established either invested abroad directly or served as a holding company through its ownership of the securities of a locally incorporated company. Each free-standing company that was established primarily to conduct foreign business in a single foreign country usually also operated in a single economic activity. Collectively, the activities abroad of these companies spanned the whole economic spectrum from the primary sector, manufacturing and services (including public utilities, transportation and banking services) (Wilkins, 1988b).3 The enterprises were both local market oriented and supply oriented in providing for the needs of Britain or, less often, third countries. Apart from the free-standing companies, the emergence of the modern British MNC starting in the 1860s became responsible increasingly for British FDI. These companies which similarly invested abroad in pursuit of more markets and/or sources of supply comprised manufacturing companies as well as producers of services (trade, shipping, insurance, accounting, engineering and so forth) (Wilkins, 1988b). Resource-based FDI prior to 1914 As in the case of the United States, the majority of British FDI in the period prior to 1914 were comprised largely of supply-oriented resource-based investments and associated investments in services (trading, distribution and transportation) geared primarily to support both the expansion of the domestic processing industries whose growth was spurred by the First Industrial Revolution, and the needs of domestic consumers. These investments in basic inputs and other agricultural products were apparently conducted more commonly by free-standing companies, and being that the United Kingdom was resource scarce, there were often no comparable domestic activities (Wilkins, 1988b). Apart from the free-standing companies, these primary sector investments were also conducted by British companies in manufacturing, petroleum and trading that extended their investment interests outside the territorial borders of the United Kingdom through backward vertical integration into the establishment or acquisition of plantations, farms and mines in foreign countries. Some of the best known examples are discussed below. The investments were often vertically integrated to cover extraction/cultivation, processing and supporting service sector investments in finance, insurance, transport and distribution that facilitated international trade in raw materials and foodstuffs (Jones, 1996). Such early evidence of the presence of an international hierarchical organization served to protect companies from vulnerabilities to sudden price increases and/or supply

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interruptions (Vernon, 1983). This can be seen as the rationale behind the many resourceseeking overseas investments of resource-based companies such as British Petroleum, Shell, Burmah Oil, Rio Tinto Zinc and the Charter Consolidated Company over more than a century (Dunning and Archer, 1987). Such imperfections in the primary product markets in the nineteenth and early twentieth centuries also explain the motivations of several resource-based British manufacturing companies to internalize the markets for their required natural resources. The location of resource-based investments by British companies was determined by the presence of the required natural resources in abundance, but other variables such as exploration and extraction costs, land rents, transport costs and host government attitudes towards foreign ownership of natural resources were also important considerations (Dunning and Archer, 1987). In general, although the investments were spread widely in resource-rich developing countries, the United States and Latin America, there was a marked concentration in the British colonies and Commonwealth countries as a result of Imperial policies and the position of Great Britain as head of British empire (Wilkins, 1988b). The demand for minerals by domestic industry and the position of the United Kingdom as the centre of the international mining industry explain both the early emergence of the free-standing British mining MNCs, and the massive growth of their FDI in mining. Although the hundreds of British free-standing mining companies were usually small, the St John d’el Rey Mining Company and Rio Tinto Zinc Company were exceptions. Six British-owned companies were exploiting Brazilian goldfields by the 1830s, a process that began in the 1820s. By the middle of the nineteenth century there were a significant number of direct investments in minerals in various European countries (Jones, 1996). For example, there were at least 174 British mining companies that owned or controlled copper-pyrites, iron, lead and silver mines in Spain between 1851 and 1913. French, German and British interests dominated the Spanish minerals industry (Harvey and Taylor, 1987). There were another 659 British-registered companies in mining ventures in the United States between 1880 and 1904 (Wilkins, 1989). Foreign-owned (mainly British) companies accounted for more than 25 per cent of the copper mining output of the United States by 1889. South Africa was also an important host country after 1913, with the discovery of goldfields in that country. Over 20 per cent of the British firms in mining, and 40 per cent of the capital invested was in the southern African gold industry (Harvey and Press, 1990). The position of the United Kingdom as the world’s largest producer of tin, copper and lead until around 1850 provided its firms with mining skills and technology which were exploited abroad. Thus, although by 1900 the country was no longer an important producer of any mineral except coal, the success of its overseas mining activities in the late nineteenth century and afterwards was enhanced by the accumulated mining skills and technology from the old mining region of Cornwall (Jones, 1996). Apart from minerals, another important area of supply-oriented investments by the United Kingdom was petroleum. Investments in this industry dwarfed all other resourcebased investments (Dunning, 1992). The Royal Dutch Shell Group first engaged in FDI in 1890 and had invested in oilfields, refineries and distribution in the United States,

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Venezuela, Dutch East Indies, Russia and Europe by 1914 (Jones, 1996). British Petroleum began as one of dozens of British free-standing companies established in 1901 to search for oil in various parts of the world. Unlike Shell, the company held a much smaller share of the world oil market, and its competitive position rested on the control of the rich Iranian oil reserves (Bamberg, 1994). The establishment of rubber plantations overseas by British companies was stimulated by the worldwide surge in demand for rubber from the early 1900s, the high prices fetched by that commodity before the First World War, and the supply constraints subsequent to the various restrictive cartel agreements that came into force in the interwar years. European-owned plantation companies were established throughout the colonial possessions in South East Asia, which by the First World War accounted for two-thirds of the total world output of rubber (Jones, 1996). The investments in plantation rubber overseas was conducted by both free-standing companies and classic MNCs. Among the latter was the British rubber and tyre manufacturing company, Dunlop, which was engaged in backward vertical integration in rubber plantation through the acquisition of rubber estates in Ceylon and Malaya before the First World War (Jones, 1984a). By 1917, Dunlop owned about 60,000 acres of land devoted to rubber plantation in the Malay peninsula and 2,000 acres in Ceylon (Jones, 1986b). There were other instances of backward vertical integration by British manufacturing companies in the other resource-based industries. Among the most notable were the investments in the 1900s by Lever Brothers—Unilever’s British predecessor—which began to acquire palm oil and copra plantations overseas in the Solomon Isles, the Belgian Congo and Nigeria in order to guarantee supplies for their soap manufacturing business in the face of a predicted shortage of vegetable oils (Fieldhouse, 1978; Wilson, 1954). There is also Cadbury’s investments in cocoa plantations in the Gold Coast and Trinidad; Imperial Tobacco’s activities in tobacco leaf plantations in Nyasaland; Tate & Lyle’s investments in sugar estates in Jamaica, Trinidad, Belize, Zambia and Zimbabwe; and Turner and Newall’s investments in asbestos mines in Rhodesia and South Africa, among other numerous examples (Dunning, 1992; Dunning and Archer, 1987).4 In some cases the cross-border vertical integration was undertaken by a trading firm: this was the case for example with Booker McConnell, a trading company which bought sugar plantations in British Guyana in the 1830s, and accounted for 70 per cent of Guyana’s sugar output by the early 1950s (Chalmin, 1990). There were other primary sector-based activities that engaged British MNCs in foreign countries in the late nineteenth century. However, unlike their investments in minerals, oil and industrial raw materials to serve the needs of rapidly growing domestic industries, some of the agriculturally based overseas investments often arose from entrepreneurial perceptions of profitable opportunities. This was the case with cattle raising which attracted considerable FDI by many British free-standing companies. Attracted by the very high profits earned by indigenous cattle firms in the United States, these companies acquired large acreages of cattle ranges in Texas, Wyoming, Colorado and New Mexico (Lewis, 1938). There were some 41 acquisitions by British companies of cattle ranges in the American West between 1879 and 1889 representing over £10 million of investment, but most of the ranches reverted to American ownership by 1914 (Wilkins, 1989). No

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less important were the large land companies established by British companies in Latin America, especially in Argentina from the 1880s, for the purpose of raising livestock. While some of these were investments by free-standing companies, other investments were undertaken by large integrated enterprises, e.g. Liebig’s Extract of Meat Company which owned vast cattle estates in Argentina and Uruguay by 1913 (Stopford, 1974). Services sector FDI prior to 1914 The most prominent of British MNCs in services prior to 1914 were the trading companies (Yonekawa and Yoshihara, 1987). As an island economy with scarce natural resources, Britain has always been dependent on international trade and hence the emergence of well-developed and numerous British trading companies with important roles in the development of British business abroad. As mentioned, this could take the form of trading companies acting as the core of British-based investment groups established before 1914 (Chapman, 1985). There were also British individuals involved in shipping as part of free-standing companies (Porter, 1986), and consulting and managing engineers such as John Taylor & Sons that managed free-standing mining companies around the world (Harvey and Taylor, 1987). There was also the expansion abroad of British banks which formed a significant aspect of British business overseas. The lack of British ‘universal’ banks (Cottrell, 1991) precluded the possibility of the British banking sector to assist directly in the expansion of British business abroad. Instead, it was often the investment group with a trading company at its core that fulfilled a more significant and major role (Chapman, 1985). Many of the British international and imperial banks began as free-standing companies, of which the Imperial Bank of Persia is an example (Jones, 1986c). Manufacturing sector FDI prior to 1914 Between 1870 and 1900, resource-based extractive investments grew more slowly as a new type of British industry more closely related to new consumer needs began to emerge. International production was confined to a limited number of companies before 1880 (Jones, 1996), and some of these early forays by British MNCs in the manufacturing sector were undertaken by free-standing firms. There were thousands of British free-standing firms active in the United States in the late nineteenth century, and there were more than 100 British parent companies that built or acquired some 255 manufacturing plants in the United States before 1914. Most of the British free-standing firms and approximately one-third of the factories established by the classic MNCs proved unsuccessful, short-lived or were no longer British owned by 1914 (Wilkins, 1989). Over time, the direct capital exports of the United Kingdom consisted more of the establishment of foreign subsidiaries and branches by enterprises already operating in their home countries—essentially the kind of foreign activity of modern classic MNCs which mainly predominates in modern time. The managerial and technological competences developed in their home countries gave firms the ability to initiate and

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sustain their international production activities. Unlike the earlier resource-based investments which were directed primarily to resource-rich developing countries in the colonies and the Commonwealth, the emergent import substituting manufacturing investments prior to the First World War displayed a preference for high-income markets, but with some bias towards countries belonging to the British empire owing to political and other psychic ties. This shift in the pattern of MNC activity developed rapidly around 1875, and became established firmly in 1914 (Dunning, 1983). At least 15 major British MNCs emerged by 1914, of which 14 were manufacturing companies. These were Babcock & Wilcox (industrial machinery), British American Tobacco (tobacco), Bryant & May (matches), J. & P.Coats (cotton thread), Courtaulds (rayon), Dunlop (rubber tyres), English Sewing Cotton (cotton thread), Gramophone (records), Lever Brothers (soap), Nobel Explosives (chemicals), Pilkington Brothers (glass), Reckitt & Sons (household products), Royal Dutch Shell (oil), Vickers (armaments) and Burroughs Wellcome & Co. (pharmaceuticals) (Dunning and Archer, 1987). All of these major pioneering British MNCs that emerged pre-1914 held strong oligopolistic positions in their domestic markets, and several were members of international cartels or market-sharing agreements (examples included Babcock & Wilcox, British American Tobacco, Bryant & May, Gramophone and Nobel Explosives). These agreements both allowed the participants favoured access to certain markets (usually the markets of the British empire and/or Europe) and provided protection from competition from other firms. A further advantage of some of these pioneering British MNCs was their privileged access to essential inputs or raw materials as mentioned earlier in this chapter (the case with Dunlop, Lever Brothers and Royal Dutch Shell, for example). Perhaps the most outstanding feature of the ownership advantages of the major pioneering British MNCs was the role of individual entrepreneurs or a small group of entrepreneurs that were often also the owner-managers in determining the course of both domestic and overseas expansion of their respective companies. This included Sir James Kemnal (Babcock & Wilcox), J.B. Duke (British American Tobacco), Gilbert Bartholomew and George W. Paton (Bryant & May), D.E. Philippi (J. P. Coats), Henry Tetley (Courtaulds), du Cros family (Dunlop), A. Dewhurst (English Sewing Cotton), Fred Gaisberg (Gramophone), William Lever (Lever Brothers), Thomas Johnson, Lord Melchett and Sir H.D. McGowan (Nobel Explosives), Pilkington family (Pilkington Brothers), T.R. Ferens (Reckitt & Sons), Marcus Samuel and Henri Deterding (Shell), Basil Zaharoff (Vickers) and Henry Wellcome (Wellcome) (Archer, 1990).5 The concentration of domestic and international production of a significant number of British manufacturing MNCs in branded consumer goods (Dicken, 1992; Chandler, 1986) was a reflection to a large extent of the comparative advantages of the United Kingdom in labour intensive, capital neutral and human capital-scarce products (Crafts and Thomas, 1986) and, in some cases, the technological hegemony of the United Kingdom in the industries associated with the First Industrial Revolution. Many of these companies were in the textiles or textiles-related industries that had grown first and foremost in the United Kingdom and had begun to invest in a major way in the United States, Canada, France, Germany and Russia (Wilkins, 1989).6 The ownership advantages of British

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MNCs in consumer goods industries derived generally from their ability to supply differentiated and high-quality consumer products and their control of selling outlets (Dunning and Archer, 1987). Only to a limited extent did British manufacturing MNCs emerge from the more technology intensive and knowledge intensive industries spurred by the Second Industrial Revolution in the second half of the nineteenth century. This was the case with Babcock & Wilcox (industrial machinery), Nobel Explosives (chemicals), Royal Dutch Shell (oil), Vickers (armaments) and Burroughs Wellcome (pharmaceuticals). The Second Industrial Revolution witnessed further organizational and technical innovations (such as electricity and the internal combustion engine, the inter-changeability of parts and the introduction of new continuous processing machinery) that not only enhanced the capacity of firms to create or acquire proprietary rights and to produce and distribute at a much larger scale of output through mass production and mass distribution, but also provided firms with opportunities to become multi-product, multinational and multi-regional entities (Cantwell, 1989b). The implications of the later advances were truly transcontinental. The modern industrial enterprise grew both by horizontal and vertical integration (Chandler, 1980). Unlike the technical and organizational advances of the First Industrial Revolution which had a greater effect on the development of processing industries, those of the Second Industrial Revolution of the mid- and late nineteenth centuries encouraged the development of fabricating industries such as motor vehicles, office machinery, electrical goods, synthetic chemicals and others. As the United Kingdom had already surrendered much of its earlier lead by the last quarter of that century, it missed out on many of the more recent developments brought by the Second Industrial Revolution and hence the development of the more modern growth industries was influenced heavily by American and, to a lesser extent, German innovations and practices (Dunning and Archer, 1987). Indeed, by comparison to the period between 1750 and 1850 the share of the United States in the important inventions discovered in the second half of the nineteenth century doubled to 32 per cent and the share of Germany increased significantly from 12 to 21 per cent, while the shares of Britain and France declined substantially from 38 per cent to 16 per cent and from 24 per cent to 19 per cent, respectively (Streit, 1949). In addition, an examination of the industrial distribution of the 200 largest manufacturing firms in selected countries at the time of the First World War showed that some 50 per cent of American firms were in the newer or mainly producer goods industries compared with only 28 per cent of British firms. The respective shares for American and British firms in the older or mainly consumer goods industries were 50 per cent and 72 per cent, respectively (Chandler, 1980). The failure of the United Kingdom to catch up in the more modern fabricating industries had important implications for both their domestic and international production. Several of the British MNCs whose competitiveness was based on the more recently developed products and/or processes of the Second Industrial Revolution, although displaying some innovatory strength based on long experience, cannot be considered to have advanced technology.7 The crucible steel makers are an excellent case in point (Tweedale, 1987). In fact, many were reliant on technology and knowledge acquired from overseas, mainly but not exclusively from the

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United States. Among these were Babcock & Wilcox (industrial machinery), Gramophone (records), Nobel Explosives (chemicals) and Wellcome (pharmaceuticals) (Dunning and Archer, 1987), and also Courtaulds (rayon), Burroughs Wellcome (pharmaceuticals), Brunner, Mond (alkalies), and Marconi (radio installations).8 Thus, British business innovation in the modern indus-tries has been promoted by foreigners rather than by those in mainstream Britain (Wilkins, 1988b). Furthermore, for some of the companies that made producer goods (Bradford Dyers, United Alkali, H. & G.Bullock) the home industries were often related to textiles. The lacuna that developed in the domestic economy as a result of the inability of domestic firms to emerge in the more modern growth industries could only be filled through imports and inward FDI by foreign based MNCs at a later stage. The balance of evidence suggests that the new product and process innovations introduced through inward FDI has enabled foreign MNCs to steer the domestic economic structure of the United Kingdom consistently towards the technologically more advanced and internationally oriented sectors (Dunning, 1958, 1985). The determinants of international production by British manufacturing MNCs in both the traditional and modern industries was the inability of important foreign markets to be supplied, or supplied as cheaply, through exports (Dunning, 1985). In some cases, the initial decision to go abroad before 1914 rested on more favourable production costs in the foreign location, the provision of host government incentives or patent legislation but more often than not import restrictions imposed by the host governments was the key element that rendered exports uncompetitive in foreign markets (Coram, 1967; Buckley and Roberts, 1982).9 After 1880, imported manufactured products faced higher tariffs in the United States, Canada and most European countries (Jones, 1996).10 Indeed, high foreign tariffs were the single most important factor leading to international production by British market-seeking FDI before 1914 (Archer, 1986; Jones, 1986a).11 In addition, high transport costs encouraged foreign production by Babcock & Wilcox, Gramophone and Nobel Explosives whose products were high volume/low value or dangerous to export over long distances (Nobel). Tariffs and transport costs often combined to prompt British manufacturers to establish overseas subsidiaries, particularly in countries where there was strong or emerging indigenous competition (Dunning and Archer, 1987). In light of these high transfer costs, three options were considered by exporting firms: the first was the complete abandonment of the export market; the second was the licensing of intangible assets to foreign firms; and the third was international production in the export market (Dunning, 1985). All of these routes were chosen by different companies, but it was the last route which enabled the emergence of some of the more enduring MNCs (Stopford, 1974). Where the exporting firms decided to maintain their business in foreign markets, FDI was often chosen over licensing as a mode of entry in foreign markets because of the expectation of capturing a fuller economic rent by exerting greater control over their proprietary rights (Dunning, 1985). Indeed, few British manufacturing companies seem to have chosen the licensing option before the Second World War due to the lack of enforceable patent legislation, the difficulties of monitoring the licensee’s business or the early stages of development of foreign markets which necessitated the total control over operations from the start. Other factors that contributed

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to the internalization of firms producing high-quality consumer goods were the lack of licensees with the necessary capabilities and trust, while for those firms in high technology industries it was the inappropriate use of the market for the transfer of knowledge that was non-codifiable, idiosyncratic or tacit (Dunning and Archer, 1987). All these factors compelled several British manufacturing firms, many of whose trade had been with these countries, to move the whole or part of their plants to these countries in order to maintain and expand their business (Mason, 1920). In some cases, the manufacturing firms had already established foreign sales branches in the export markets to either promote their exports of differentiated consumer products in foreign countries with high per capita incomes based on marketing expertise developed in the home market or to ensure and stabilize the demand for producer goods where firms typically incur large sunk costs (Dunning and Archer, 1987). These overseas sales branches have been rendered ineffective in the face of trade barriers and/or where there was strong or emerging indigenous competition. The product cycle model is a useful framework to explain the shift of location of production from the home country in the innovative new stage (or innovation-based oligopoly) to other relatively advanced countries and previous export markets in the maturing product stage (or mature oligopoly) in the presence of high transfer costs in the form of tariffs or threat of new competition. While these served as powerful ‘galvanizing forces’ to international production (Vernon, 1966), international production also provided the opportunity for firms to have a direct presence in the market and to cater to the specific and special needs of local customers (Dunning, 1992). Another contributory factor that prompted the shift from exports to international production by British manufacturing firms particularly those in the more modern fabricating industries was the need to sustain a process of competition between firms in oligopolistic industries. In such cases, the motive for FDI was not determined by profits but by the need to protect the firm’s overall competitive position through precluding rivals from gaining a foothold in a foreign market or through engaging in cross investments. Examples abound showing the influence of the behaviour, or anticipated behaviour, of competitor firms as a determinant of international production, including the establishment of Dunlop’s plant in Japan in 1899 as a preemptive move against American tyre companies as well as its loss-making plant in France to combat the firm’s rival firm, Michelin; Royal Dutch Shell’s investment in the United States in 1912; and Pilkington’s investments in Canada in 1913, among other examples (Jones, 1986b; Dunning and Archer, 1987).

The growth of British MNCs in the inter-war years The inter-war years saw the collapse of international capital markets in the late 1920s and early 1930s, and was an era marked by political instability, economic depression and market fragmentation. At least 17 new major firms emerged to become MNCs between 1915 and 1939 (Dunning and Archer, 1987) in an atmosphere where industrial concentration, rationalization and cartelization became the norm. The competitive advantages of British MNCs during this period were very similar to those of the previous

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era which derived from asset ownership advantages, despite the stark difference in the underlying economic and political environment in which FDI was undertaken in the two eras. In addition, the newer MNCs also tended to hold a similar prominent position in the domestic market, to have been established for a long time, and to be led by owner/entrepreneurs with similar drives and visions so important in the determination of the growth path of their companies. Thus, unlike in the case of the American companies (Chandler, 1980), managerial hierarchies in British companies during the inter-war period failed to develop and only a small proportion of British companies had established a multi-divisional structure even by 1950 (Channon, 1973). While British FDI in the manufacturing sector was becoming increasingly significant with a share of some 25 per cent of outward FDI stock in 1938 compared to 15 per cent in 1914 (Dunning, 1983), international production by British manufacturers remained oriented towards the mature, relatively low technology sectors whose competitiveness emanated from the high income and large size of the British market. These were firms of large size and established technological advantages that derive strengths from product differentiation, quality, and marketing and managerial skills and experience. These characteristics favoured the continuing pre-eminent role of consumer goods firms as the new British MNCs during the inter-war years. Among these were the confectionery firms Cadbury, Rowntree, Pascall and Fry, as well as Peek Frean (biscuits), Cantrell & Cochrane (soft drinks), Distillers (alcoholic drink) and Yardley (soap) (Corley, 1989). Several of the new British MNCs that emerged in the higher technology industries, including Coates Brothers and Metal Box (metal products) continued to depend greatly on new technological developments from the United States. The slow adjustment of British firms to the more rapid growth opportunities offered by the modern industries was regarded to be a function of the peculiar nature of the British economy which posed a host of institutional barriers that prevented industrial restructuring towards the growthoriented sectors, including investments in innovation that would sustain those industries. Such barriers included, among others, the lack of provision for commercial studies and for any kind of technical education for managers and industrial staff (Ashworth, 1960; Chandler, 1980).12 Other contributory fac-tors were the risk averse strategy of British firms which continued to emphasize industries and sectors in which past successes had been based, the presence of a protected home market and the continuing preferential market access in the empire and Commonwealth markets during the 1940s and 1950s (Dunning and Archer, 1987). As the technological leading position of the United States strengthened in the inter-war years, the ratio of its outward FDI stake to its inward FDI stake rose from 1:8 in 1914 to 4:1 in 1938, while that of the United Kingdom declined from 33:1 to 15:1 over the same period (Dunning, 1983). The prevailing economic and political climate of the inter-war period served to strengthen the protectionist stance of host country governments and, as a result, import restrictions continued to be the main locational factor determining MNC expansion during this period (Corley, 1989; Jones, 1984b; Nicholas, 1982; Chandler, 1980; Stopford, 1974).13 However, the transportation difficulties that British exporters faced in the years between 1914 and 1918 was also a contributory factor (Dunning and Archer, 1987).

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With the growth of industrial concentration, rationalization and cartelization in the inter-war years, the operating decisions of most large British MNCs, including their decisions to engage in international production, were taken in light of intense international oligopolistic rivalry. The actions or anticipated actions of their major international competitors was therefore key for both new and existing MNCs such as the resource-based companies of Shell and Imperial Tobacco, the high technology manufacturers such as APOC, Pilkington Brothers, Courtaulds, Dunlop, and George Kent and even for some manufacturers of consumer products such as the confectionery companies, Cadbury and Rowntree, that previously relied on exports to serve foreign markets prior to 1914.14 These companies began to establish factories in Australia, Canada, New Zealand, South Africa and Ireland in the interwar years (Corley, 1989; Jones, 1986a). Such atmosphere of intense rivalry somewhat abated during the 1940s and 1950s when British companies with neither the resources nor the competitive strengths became less generally influenced in their FDI decisions by the behaviour of their competitors, with the exception perhaps of Pilkington Brothers, Unilever, British Petroleum and Shell (Dunning and Archer, 1987). The preference of British FDI in the empire and Commonwealth was reinforced during the inter-war years. Apart from having political stability, large and/or growing markets, and a transportation and communications infrastructure, these markets were favoured by psychic proximity, traditional ties and indirect enforcement (Svedberg, 1981). This led many British companies to both develop important trading links with these countries and to regard these markets, particularly the White Dominions and India, as a natural extension of their domestic markets in much the same way that Canada had been for American MNCs.

The evolution of British MNCs since the Second World War As countries recovered from the effects of the Second World War, the international and economic and political environment became increasingly favourable to the expansion of FDI. The early post-war period was associated with the surge in technological developments, the further improvement in international communications and stable exchange rates. The stability, growth and full employment of the first 20 years of the post-war period was consistent with the ‘Golden Age of Capitalism’ (Kitson and Michie, 1995). It was also the period most closely associated with the peak of United States hegemony. As a result, the ratio of the outward FDI stake to the inward FDI stake of the United States rose further from 4:1 in 1938 to 6:1 in 1971, while that of the United Kingdom declined further from 15:1 to 8:1 over the same period. By 1980, the respective ratios both fell to 3.2:1 and 1.7:1 (Dunning, 1983). Just as the fall of the ratio in the case of the United Kingdom was a reflection of the long-term decline in its technological leadership since the First Industrial Revolution, the fall in the ratio of the United States beginning in the 1970s was a reflection of the gradual decline in that country’s industrial hegemony in favour of several European countries (Germany and Sweden, in particular) and Japan.

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At least another 26 new major firms emerged to become British MNCs between 1940 and 1959 (Dunning and Archer, 1987). Although their emergence has contributed to the continuing increase in the absolute value of British FDI, the share of the United Kingdom in world FDI stake has declined considerably. Indeed, the baton of leadership in world FDI passed from the United Kingdom to the United States in the period since the Second World War. The new British MNCs that emerged in the period since the Second World War displayed characteristics that were essentially more of the same as that of the pioneering British MNCs that emerged prior to 1914 and the inter-war period. British MNCs still did not feature prominently in the more modern and growth-oriented fabricating industries, a reflection in part of the country’s adherence to imperial ties established in the past. Indeed, 61 per cent of the net foreign assets owned by British MNCs in 1960 in industries outside oil, banking and insurance was directed towards the Commonwealth countries (Dunning, 1985). Although the imperial legacy of the United Kingdom still bears some influence in the more recent geographical pattern of British FDI, there has been a re-direction in the geographical destination of British FDI since 1960 with a greater focus placed on the United States and Western Europe. An increasing proportion of British FDI was directed towards the United States even in light of intense competitive pressures and in the original six member states of the European Economic Community (EC) as recovery and expansion proceeded and as closer regional economic integration progressed, culminating in the accession of the country to the EC in 1973.15 Thus, there has been an increasing propensity for British MNCs since the 1960s to invest in countries with higher per capita incomes and larger markets than itself (Stopford, 1976). It is also a reflection of the objective of several British companies to establish a presence in the major centres of technological excellence in light of the growth of global competition (Cantwell, 1989a). Continuing structural shifts in the pattern of outward FDI resulted in the dominance of the manufacturing sector in the period since the Second World War. The decline of supply-oriented FDI by British MNCs since 1960 can be seen as arising from the increased efficiency of commodity and futures markets and, more significantly, the increasingly hostile stance by host country governments in the resource-rich developing countries to the foreign ownership and exploitation of strategic resources. This was evident in the spate of nationalization and expropriation of foreign property in resourcerich developing countries starting from the 1960s which reached a peak in the mid– 1970s (UNCTC, 1988). Nevertheless, British mining investments abroad continued at an average rate, and some mining investments by British MNCs in non-ferrous metals and petroleum even grew rapidly. The share of the manufacturing sector in the total FDI stock of the United Kingdom (and the United States) increased further to about 35 per cent in 1960 from a share of 25 per cent in 1938 (Dunning, 1983). Such 35 per cent share of manufacturing in total outward FDI stock of the United Kingdom was maintained until the early 1990s. The determinants of international production by British MNCs in the more modern industries in the period since Second World War appear to be categorically distinct from those in the more traditional industries. For those in the more modern industries, the establishment of local subsidiaries in certain key markets during the 1970s and 1980s was

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an integral part of the pursuit of oligopolistic strategies on a global scale. The concepts of ‘exchange of threats’ and ‘follow the leader’ associated with intra-industry production in oligopolistic competition described by Graham (1975, 1978, 1985) and Knickerbocker (1973) respectively appear to be highly relevant in explaining the international production patterns of Beecham, British Petroleum, Imperial Chemical Industries, Pilkington Brothers, Plessey, Unilever, Redland, Allied Colloids and Tace in the period since the Second World War. The cross-penetration of national markets in the advanced industrialized nations by MNCs is linked to the convergence in the structure of production and taste patterns in these countries and facilitated by the economies of largescale production (Dunning and Norman, 1985). It is also these MNCs that have been pursuing more rationalized or efficiency-seeking investments since the 1970s associated with an increasing amount of intra-firm trade and product and process specialization. These investments were motivated by the need to capture the gains from the economies of specialization and integration through taking advantage of differences in factor endowments and costs across different countries as well as to maintain international competitiveness by securing a presence in the major growth markets of the world. For these MNCs that have a higher degree and extent of multinationality, their asset ownership advantages (Oa) are complemented by ownership advantages that arise from multinationality (Ot) leading to transaction cost reduction or the attainment of transaction benefits in international production. It is the pursuit of the latter form of ownership advantages that has provided the incentive for MNCs to both widen and deepen their networks of international production. On the other hand, for the British MNCs in traditional consumer goods industries that neither engaged in rationalized production and investment nor sought to benefit from transaction cost advantages, their incentives to internationalize in the period since the Second World War were not dissimilar to that in the earlier periods. These firms remained keen to exploit their preferences to produce in the markets of the empire and Commonwealth until the early 1960s when the exporting route became difficult or no longer practical. Such dualistic pattern of the international production of British firms is a reflection of the domestic economic structure of the United Kingdom which although geared towards the industries of high and medium technology is propelled by the investments of foreignbased MNCs. The more traditional low technology and consumer goods manufacturing sectors on the other hand are where the indigenous strengths of British firms lie which explain the dominant role of these sectors in the foreign activities of British MNCs. Inward and outward FDI in and from the United Kingdom has, therefore, been directed towards different industries. Nowhere is this more evident than in the report prepared by Reddaway et al. (1968), which showed that, following a historical trend, 71 per cent of the net foreign assets owned by the leading British manufacturing MNCs in 1964 were in the less technology intensive sectors of food, drink and tobacco, household products, paper, metal products, building materials and textiles, while 29 per cent were in the more technology intensive sectors of chemicals, engineering, electronics and motor vehicles. By contrast, some 67 per cent of the net assets of foreign (mainly American) firms in the United Kingdom in 1965 were in the more technology intensive sectors and only 33 per

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cent were in less technology intensive sectors (Dunning, 1985). This also helps to explain the different patterns of exports of the United Kingdom and that of the international production of British MNCs. The industrial structure of British manufactured exports in the years between 1965, 1970 and 1975 continued to differ sharply from that of its manufacturing FDI but for an entirely different reason than that pertaining to the end of the nineteenth century when international production displayed a higher technological intensity compared to that of exports. A study conducted by Clegg (1987) indicated that capital intensity and the skill level of managerial manpower exerted significant positive influences on British FDI in manufacturing between 1965 and 1975, while the skill level of production workers exerted a highly significant negative influence. This contrasts sharply in the case of British exports of manufacturing in which technological intensity exerted a highly significant positive influence. Britain’s present day comparative advantage which rests on the production of labour intensive, capital neutral and human capital-scarce products has remained essentially stable since 1870 (Crafts and Thomas, 1986). Firms in a broad range of industries continue to be more concerned with the production of low-cost standardized goods than in high-quality, technology intensive niche products (Porter, 1990). The employment pattern developed on this basis may have even become further entrenched during the 1990s (Nolan and Harvie, 1995). Until the 1970s foreign affiliates established by British MNCs were largely truncated replicas of their parent companies and MNCs considered their network of foreign affiliates as a federated group of firms, each of which was designed to produce and sell products for the particular national markets in which it operated (Dunning and Archer, 1987). Although several British MNCs since the 1970s and 1980s have become increasingly aware of the attainment of transaction cost reducing advantages (Ot) arising from their geographical diversification, the number of British companies that have attained this in a significant way through the rationalization of their production and markets across national frontiers has remained essentially confined to British MNCs in internationally oriented high technology industries. Among the more globalized British firms are Imperial Chemical Industries, Glaxo, Unilever and Shell. These companies have adopted a transnational strategy in at least some of their value-chain activities, including R&D (Lane, 1998). Some evidence of industrial upgrading in the pattern of British FDI in manufacturing may have become evident over the last decade. Products of coal, petroleum, plastics and chemicals; food, drink and tobacco; and electrical machinery accounted for 60 per cent of the total outward FDI stock of the United Kingdom in the manufacturing sector or 22 per cent of their total outward FDI stock in all industries in 1988. By 1997, the most important manufacturing industries for British MNCs were food, drink and tobacco; coal, petroleum, plastics and chemicals; transport equipment; and metals and mechanical engineering. These industries accounted for almost 72 per cent of the total outward FDI stock of the United Kingdom in the manufacturing sector or 27 per cent of their total outward FDI stock in all industries in that year (based on data in UNCTAD, 1999). From a concentration in the primary sector in the era before 1914, and the growth of manufacturing sector particularly since the Second World War, the relative importance of

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the primary, secondary and tertiary sectors in British FDI continues to evolve. The attainment of almost equal shares of the three sectors in the total outward FDI stock of the United Kingdom in the mid– 1980s has given way since to another major sectoral shift in the pattern of British FDI. With the increasingly larger share of services in the outward FDI stock of the United Kingdom at the expense of the primary sector, this sector became the dominant sector of activity of British MNCs accounting for 46 per cent of total British outward FDI stock in 1991. Thus, over the course of some 200 years, the dominant sectoral pattern of British FDI has spanned the primary, secondary and tertiary sectors.

Conclusion This chapter examined the emergence and evolution of British MNCs. The United Kingdom was one of the pioneering home countries of MNCs, and dominated the process of MNC expansion prior to the Second World War. The origins of British MNCs in the period prior to 1914 were seen in four types of enterprises: the free-standing companies, the classic or modern MNCs, the migrating multinationals and the investment groups. These institutions provided the means to profitably exploit abundant and relatively cheap capital in Great Britain in lucrative investment opportunities abroad as well as to maintain control over the capital transferred. The majority of British FDI in the period prior to 1914 comprised largely supplyoriented resource-based investments and associated investments in services (trading, distribution, transportation, finance and insurance) geared primarily to support both the expansion of the domestic processing industries whose growth was spurred by the First Industrial Revolution, and the needs of domestic consumers. These investments were spread widely in resource-rich developing countries, the United States and Latin America, although there was a marked concentration of British FDI in the British colonies and Commonwealth countries as a result of Imperial policies and the position of the Great Britain as head of the British empire. Between 1870 and 1900, resource-based extractive investments grew more slowly as a new type of British industry more closely related to new consumer needs began to emerge. Import substituting manufacturing investments abroad by British firms displayed a preference for high-income markets, but with some bias towards countries belonging to the British empire owing to political and other psychic ties. The concentration of both the domestic and international production of a significant number of British manufacturing MNCs in branded consumer goods was a reflection to a large extent of the comparative advantages of the United Kingdom in labour intensive, capital neutral and human capitalscarce products and, in some cases, the technological hegemony of the United Kingdom in the industries associated with the First Industrial Revolution. Such comparative advantages of Great Britain has remained essentially stable to the present time. The importance of British FDI in manufacturing increased in the period since the Second World War. The share of the sector in the outward stock of British FDI has remained around 35 per cent since 1960. The services sector became the dominant sector

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of British FDI since 1991. Thus, over the course of some 200 years, the dominant sectoral pattern of British FDI has shifted from the primary sector in the period prior to 1914, towards the secondary sector for much of the period since the Second World War, and then the tertiary sector since the 1990s.

Notes 1 The extensive British activity abroad in sugar and tea plantations reflected that country’s very high level of sugar and tea consumption (Chalmin, 1990). 2 The free-standing companies attracted not only British capital, but also French, German, Belgian and other foreign investors (Wilkins, 1988b). 3 The different activities of British free-standing companies included, among others, rubber cultivation in Malaya, copper mining in Russia, cattle ranches in the United States, meat packing in Argentina, nitrate mines in Chile, railroads in Brazil, hotels in Egypt and mortgage companies in Australia (Wilkins, 1988b). 4 Although the plantation estates of Cadbury in Trinidad fulfilled a quality-control function, the vast majority of the requirements of the firm for cocoa beans was fulfilled by direct purchases from independent producers in West Africa (Williams, 1931). 5 It has been argued that Wellcome’s failure to continue MNC growth after the First World War can be attributed to the loss of much of Henry Wellcome’s former commercial drive (Archer, 1990). 6 The largest British textile companies were engaged in overseas FDI by 1914. Among numerous other companies were J. & P. Coats which had mills in the United States, Canada and Russia. English Sewing Cotton produced through affiliated companies in the United States, France and Russia. Linen Thread Company had factories in the United States and France. The Fine Cotton Spinners’ & Doublers’ Association acquired around the turn of the century a dominant interest in its most prominent French competitor, La Société Anonyme des Filatures Delebart Mallet Fils. Bradford Dyers had a major plant in the United States and one in Germany. Nairn Linoleum (linoleum is made of jute or burlap and thus can be classified as a textile) had factories in the United States, France and Germany (Wilkins, 1989). 7 Evidence of some technological strength is seen in the study of Nicholas (1982) of 119 British manufacturing firms that undertook international production in the period between 1870 and 1939. His study showed that one half of those firms established foreign plants to exploit a perceived technological advantage. 8 The technology of Courtaulds in synthetic textiles was developed in part outside Britain or with the aid of foreign ideas. Burroughs Wellcome was a company founded by Americans which sold patent medicines and ethical drugs. Brunner, Mond was a firm that was part of a Belgian MNC. It was the Belgian MNC rather than the British counterpart that was the driving force behind the company’s MNC expansion. Marconi was founded by a man with an Italian father and a British mother and although the firm once held technological leadership, the company

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suffered rapidly from technological conservatism which threatened its leadership by 1914 (Aitken, 1985). 9 There is little reason to suppose that British companies were influenced by lower production costs abroad in undertaking FDI before 1914. International production seldom occurred in very labour intensive industries, and hence low labour costs abroad were rarely an enticement, except perhaps in a limited number of cases as in the international production activities of Lever Brothers and Courtaulds in the 1900s (Dunning and Archer, 1987). British American Tobacco’s investments in cigarette production in China to take advantage of low-cost labour is another example. With the use of labour intensive rather than capital intensive production techniques, the firm employed thousands of unskilled labourers in China to perform tasks that were already mechanized in the United States (Cochran, 1980). 10 Trade protectionism was a major influence on the rapid growth of British manufacturing FDI after 1880 as the worldwide trend towards free trade went into reverse. The need to raise government revenue to finance the American Civil War (1861–1865) led to a substantial rise in American tariffs. The wartime tariffs were retained after 1865, increased in the 1880s, and then raised by the McKinley Act of 1890 to an average level of 50 per cent on protected commodities. A brief lowering of American tariffs in 1894 was followed three years later by an increase to 57 per cent. Similarly, there was a return to protectionism in Europe after 1880, stimulated by a severe recession in the previous decade, the growth of European nationalism and the emergence of new European nation states such as Germany and Italy. By 1914, the only remaining countries pursuing free trade policies were the United Kingdom, the Netherlands and Denmark (Jones, 1996). 11 This was the case, for example, with the British cotton thread manufacturer, J. & P. Coats. Before the American Civil War, three-quarters of the trade of this firm had been with the United States. A 50 per cent tariff imposed by the United States in 1864 forced the company and other cotton thread producers to engage in production in the United States. By the outbreak of the First World War, British subsidiaries accounted for 80 per cent of cotton thread production in the United States (Wilkins, 1989). 12 Indeed, at the more advanced educational levels, technical and scientific instruction and inquiry remained ‘poor cousins in the family of higher learning’ in the United Kingdom in the 1900s (Murphy, 1973). This was so unlike in the United States where the need for trained managers, production and marketing specialists in the technologically advanced machinery, electrical and chemical industries had been recognized more rapidly and catered for by universities and business schools (Chandler, 1980). It was not until 1947 that the British Institute of Management was formed, and only in the 1960s were the London and Manchester Business Schools founded (Dunning and Archer, 1987). 13 After the First World War protectionism spread. By the early 1920s tariffs in the United States had been raised to their highest ever levels by the Fordney-McCumber tariff. Australia, India and some Latin American countries were among those countries that adopted import substitution industrialization strategies, and tariffs,

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import quotas and other trade barriers were imposed on imports to foster the development of infant industries. The Smoot-Hawly Act of June 1930 increased the American tariff level substantially, and other countries followed suit. By the end of the 1930s almost half of the the world’s trade was restricted by tariffs (Jones, 1996). Tariffs served to encourage foreign firms to establish local manufacturing in host countries, but also strengthened the bargaining position of national firms in international cartel negotiations (Wurm, 1993). 14 For example, the decision of Courtaulds to manufacture in France was owing to fears that its French counterparts may produce in the United Kingdom to jump the tariff imposed on imported artificial silk in 1925 (Jones, 1986b). The investments of Dunlop in Eire, India and South Africa in 1930 were similarly prompted by oligopolistic considerations (Dunning and Archer, 1987). 15 Tariff and non-tariff trade barriers caused British companies to establish subsidiaries in the EC well before the accession of the United Kingdom to the EC (Dunning and Archer, 1987).

8 The emergence and evolution of multinational corporations from Germany Introduction The origins of German MNCs can be traced to the large firms in the chemical, electrical engineering and metal-producing industries that engaged in FDI during the nineteenth century. Even at that time, the basis of their competitiveness stemmed from a concentration in low volume but high value added segments and niches (Porter, 1990), where cost control traditionally ceded place to technological perfection, and where production of standardized goods had been far less dominant than in Great Britain. Indeed, a comparatively high level of R&D intensity describe German firms and MNCs from the beginning (Chandler, 1986). Although its outward FDI was focused narrowly on Western and Eastern Europe, Germany accounted for around 10 per cent of the global stock of outward FDI by 1914 which made it the fourth-largest home country of FDI after the United Kingdom, the United States and France (Dunning, 1983). The defeat of Germany in the two world wars led to a dramatic decline in German FDI and a broad-based and dynamic growth of German MNCs was not resumed until the 1970s (Bostock and Jones, 1994). This helps to explain the high degree of embeddedness of German firms and MNCs to their home country and the predominant role of exports in their internationalization strategies (Lane, 1998). Although Germany has been the third-largest home country of FDI since 1980, outward FDI has remained a secondary strategy for German firms despite their rapid growth over the last 30 years (Heiduk and Hodges, 1992). This chapter tells the long and discontinuous history of German MNCs. The historical excursion into the determinants of German FDI and their industrial and geographical patterns is conducted in three time frames: the period prior to 1914, the inter-war period and the period since the Second World War.

The emergence of German MNCs in the period prior to 1914 Unlike the variety of historical forms of the earliest British MNCs in the period prior to 1914, the prototype of the earliest German MNCs was pre-dominantly the ‘classic’ type. These were German companies that began to do business in Germany, and then extended their business abroad through exports and international production to reach foreign markets and to obtain raw materials. Thus, the international business activities of German

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firms has, in general, always tended to be complementary to their domestic activities in Germany (Juhl, 1985). Indeed, there seem to have been few German free-standing companies that operated in foreign countries. Even migrating MNCs that featured significantly in the history of British MNCs did not appear to have been a particularly important feature in the origins of German MNCs, and neither has there been much evidence to support the presence of German investment groups abroad, i.e. independent German companies registered in the host country with German capital and management (Wilkins, 1988b).1 What was perhaps more common owing to the importance of cartels in the economic and international business history of Germany was FDI by German cartel representatives to encourage exports. For example, the potash cartel had a sales company in the United States prior to 1914 (Wilkins, 1989). German FDI prior to 1914 was significant in a wide range of industries spanning the primary, secondary and tertiary sectors of economic activity. Resource-based FDI prior to 1914 In broad similarity to MNCs from the United Kingdom, the emergence of German MNC activity can be traced to natural resource-based activities, particularly in mining and petroleum. Owing to the natural resource scarcity of Germany, many of the primary products required by the German economy but not produced there were obtained primarily through imports. Nevertheless, there were also extensive FDI to obtain raw materials by German manufacturing companies, metal trading companies and the Deutsche Bank in oil in the period before the First World War. Among the most significant German manufacturing companies that integrated backward to obtain raw materials abroad were the iron and steel manufacturers (Franko, 1976). However, the large-scale corporate players in world metals before 1914 were the three German metal trading companies: Aron Hirsch and Sohn, Beer, Sondheimer and Co., and Metallgesellschaft. Metallgesellschaft—the largest of the three trading companies founded in 1881—diversified rapidly into the mining, processing and distribution of copper, lead and zinc. The firm undertook its first FDI in 1887 which included the establishment of its American subsidiary, the American Metal Company, whose principal activities were in coal mining, smelting, refining and distribution. The firm also had mining operations and processing companies in other European countries and in 1912 it built a refinery in Belgium—the largest one in Europe—to process ore from the Belgian Congo (Jones, 1996). A large trading operation in London was also established. The German metal traders succeeded individually and jointly in vertically integrating on an international scale the mining, smelting, refining and sales of all the most important non-ferrous metals. In certain metals, such as lead, zinc, copper and nickel, the firms exerted a very significant influence on world prices (Wilkins 1989; Chandler, 1990). There were also German investments in nitrate mines in Chile (Wilkins, 1988b), as well as a short-lived participation in a borax mine in Chile by the small German pharmaceutical company, Schering of Berlin, in 1897 (Hertner, 1986a). The oil industry was another important area of early resource-based FDI by Germany

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led by the Deutsche Bank and its holding companies. For example, the bank gained control of a leading oil producer in Rumania in 1903 which it placed under the control of a holding company in which it had a 50 per cent shareholding and overall management control. A vertically integrated oil business was created which included distribution companies in a number of European countries. The defeat of Germany in the First World War led to the sequestration of German foreign assets and the nationalization of Russian oil. This eliminated the Deutsche Bank from the industry (Pohl, 1989), and a significant German presence in the international oil industry never re-emerged. Even Metallgesellschaft did not resume substantial FDI in mining production until the 1970s. Services-based FDI prior to 1914 Early German FDI in services were significant in trading and banking. Apart from the foreign trading activities of the metal traders, there were the trading companies or mercantile houses that established trading outlets throughout Europe in the period prior to 1914. The German trading house, Schuchardt and Schutte, which was regarded as the most prestigious distributor of machine tools in Europe had outlets in Germany, Austria, Belgium and Russia to promote German exports, and corresponding outlets in Guatemala and Turkey that played a more important role in facilitating German imports than in selling German exports (Feldenkirchen, 1987). And then there were the ubiquitous German banks active in Europe, North and South America, Asia and Africa prior to 1914, encouraging and representing German business abroad (Tilly, 1991). The role of Deutsche Bank in relation to the German search abroad for oil in Rumania and the Middle East was already mentioned. The role of the large German banks that established foreign branches helped to support the expansion of German business abroad. This was unlike the roles of banks in the United States and the United Kingdom. In the case of the United States, national banks could not establish foreign branches until after the passage of the Federal Reserve Act of 1913 while private banks established outlets in London and Paris principally to encourage the flow of European monies to America (Wilkins, 1988b). The previous chapter has shown that the lack of British ‘universal’ banks (Cottrell, 1991) precluded the possibility of the British banking sector to assist directly in the expansion of British business abroad. Manufacturing-based FDI prior to 1914 Manufacturing was perhaps the more important sector of early German FDI. The early emergence of German manufacturing MNCs can be closely associated with the position of Germany as the birthplace of modern science in the late nineteenth century (Porter, 1990). This helped the country to develop a deep scientific and technical knowledge base drawing on an abundance of skilled workers and professionals which proved instrumental in its efforts to upgrade domestic industry in the new, skills intensive, technically advanced and fast growing industries of the Second Industrial Revolution in the late nineteenth century. German firms developed strengths in the chemicals, pharmaceuticals, machinery, electrotechnical and motor vehicles industries and became significant world

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producers and exporters of their new products on the basis of accumulated expertise and proprietary technology.2 Such strengths combined with access to international capital markets at least until the end of the First World War enabled German firms to invest abroad on a substantial scale, and to exert a significant economic impact within their host economies. The predominance of typically large German firms and MNCs in industries producing the newest and most technologically advanced products can also be attributed to the rapid emergence of administrative hierarchies in German business organizations (Wilkins, 1988b). Although these technologically innovative large-sized firms led the process of German MNC expansion in high technology industries introducing new products and processes through FDI, German FDI prior to 1914 was also present in capital goods industries such as iron and steel manufacture, and relatively smaller and more moderatesized German MNCs were involved in consumer goods industries such as textiles particularly in woollens and silk and, similar to the British MNCs, in a number of trademarked consumer products. Among the most notable of these was the pharmaceutical company, E.Merck, that established a sales affiliate in New York in 1887 and a production subsidiary in Rahway, New York in 1899; Schering of Berlin that established a partnership in the New York firm of Schering & Glatz established in the late 1870s; the A.W. Faber Pencil Company which was an MNC by the 1870s with its main factory in Stein (near Nürnberg), a large slate facility at Geroldsgrun, Bavaria, branches in Paris and London, an agency in Vienna and a pencil factory in Brooklyn, New York; and a number of other German companies that were involved in the international production of trademarked food products such as chocolate and coffee, among which were Kathreiner’s Malzkaffee-Fabriken, a company founded in 1892 to produce malt coffee (Hertner, 1986a; Wilkins, 1988b). The experiences of E.Merck, Schering of Berlin, the A.W.Faber Pencil Company and Kathreiner’s MalzkaffeeFabriken, among other companies, show that it was not necessarily the large oligopolistic German firm that engaged in FDI.3 Ownership advantages have also resided in smaller companies particularly in the early phases of development of a specific market, and these advantages could be maintained with the increasing differentiation of the market (Hertner, 1986a). The following sections analyse the growth of the mainstream German MNCs in their most important industries—chemicals, electrotechnical industry, and machinery and motor vehicles industries. The chemicals industry As mentioned, Germany dominated world production and exports in the chemicals industry other than petroleum refining prior to 1914, particularly in such sectors as pharmaceuticals and artificial dyestuffs. The growth of the German chemical industry which started in the 1860s and organized in an oligopolistic market structure owed much to